ITAD BIR Ruling No. 009-16

March 4, 2016 ITAD BIR RULING NO. 009-16 Articles 13 & 23, Philippines-United States tax treaty Level Up! Inc. 11th Floor, Pacific Star Building Makati Avenue corner Sen. Gil Puyat Avenue, Makati City Attention: Michael Dennis D. Rayala Gentlemen : This refers to your application for tax treaty relief filed on August 24, 2012 requesting confirmation that the royalty fees to be paid by Level Up! Inc. ("Level Up!") to Index Digital Media, Inc. ("IDMI") are subject to the preferential rate of 15 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-US tax treaty") . Basic Representations It is represented that IDMI, formerly Atlus USA, Inc., is a US corporation, and a resident of the United States of America (USA) for purposes of U.S. taxation, as evidenced by a Certificate dated February 6, 2012 issued by the Department of Treasury, Internal Revenue Service of USA; that IDMI is situated 6400 Oak Canyon, Suite 100, Irvine, California; that IDMI is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated January 17, 2012; that, on the other hand, Level Up! is a domestic corporation with principal address at the 8th Floor, Pacific Star Building, Makati Avenue, Makati City; and that Level Up! is registered with the Board of Investments, with a pioneer status, under Certificate of Registration No. 2003-007 issued on January 20, 2003, as a "new IT Service Firm in the field of Application Service Provider. It is further represented that on March 28, 2012, IDMI and Level Up! entered into a Philippines Payment Gateway Marketing and Distributorship Agreement ("Agreement") whereby IDMI appointed Level Up! as its exclusive territory partner of Pandora Saga in the Philippines and non-exclusive territory partner of Knights of the Sky and BattleSpace in the Philippines and grants to Level Up! the sole, exclusive, non-assignable and indivisible right, license and authorization to market and promote Pandora Saga to market, promote and distribute the Client Software to end users and to market, promote, distribute and sell ePINS redeemable for the credits to end users in the territory pursuant to the terms of the Agreement ; that for and in consideration of the license, Level Up! shall pay IDMI a royalty fee at the following percentages: Game Revenue Share Pandora Saga 55% of contribution margin Knights of the Sky 70% of Net Revenue BattleSpace 70% of Net Revenue that accordingly, the first payment was made on August 29, 2012 based on the Certification issued by the treasurer of Level Up! together with an attached telegraphic transfer issued on even date. It is finally represented that the subject income payments are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal based on the Sworn Statement issued by Level Up! on July 12, 2012. TAIaHE In reply, please be informed that income derived by nonresident foreign corporations in the Philippines shall be subject to income tax at the rate of 30 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, to wit: "Sec. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., royalties, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, such income may be exempt or subject to a reduced rate pursuant to Section 32 (B) (5) of the same Code provides: "Sec. 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" With respect to a treaty, you invoke Article 13, specifically paragraph (2)(b)(ii), of the Philippines-USA tax treaty, which provides: " Article 13 Royalties 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. However, the tax imposed by that other Contracting State shall not exceed a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities , and xxx xxx xxx" (underscoring supplied) According to paragraph 2(b) above, royalties arising in the Philippines and derived by a resident of the United States are subject to (a) 25 percent of the gross amount of the royalties for royalties in general, (b) 15 percent of the gross amount of the royalties if they are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (c) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. In this case, since Level Up! is registered with the Philippine Board of Investments and engaged in preferred areas of activities based on the relevant Certification, this Office is of the opinion and so holds that the license fees to paid by Level Up! to IDMI under the Agreement are subject to 15 percent income tax rate based on the gross amount thereof, under Article 13 (2) (b) (ii) of the Philippines-USA tax treaty. cDHAES Moreover, the said royalty payments by Level Up! to IDMI being payments for the lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, shall be subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code of 1997, as amended. Accordingly, Level Up! , being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT on such royalty before making any payment to IDMI. In remitting the VAT withheld, Level Up! shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Level Up! upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Level Up! is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of goods or properties purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, Level Up! is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to IDMI upon its request and the fourth copy to be retained by Level Up! as its file copy. [ Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05); Section 4.114 (d), as last amended by RR 28-03 ] This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue