ITAD BIR Ruling No. 010-13

January 22, 2013 ITAD BIR RULING NO. 010-13 Article 12, Philippines-Japan tax treaty PHCP, Inc. Special Export Processing Zone First Cavite Industrial Estate Barangay Langkaan Dasmarias, Cavite Attention: Ms. Melissa M. del Rosario Accounting Manager Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on April 13, 2011 requesting confirmation that royalties paid by PHCP, Inc. ("PHCP") (formerly Dowa Hightech Philippines, Inc. ) to Hitachi Cable Ltd. ("Hitachi Cable") are subject to income tax at the rate of 10 percent pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") . 1 Facts Hitachi Cable is a foreign corporation and a resident of Japan based on its Articles of Incorporation and its Certificate of Residence issued by the Kanda Tax Office in Japan on June 17, 2011. Hitachi Cable is located at 14-1 Sotokanda 4-chome, Chiyoda-ku, Tokyo, Japan. Hitachi Cable is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on December 20, 2010. On the other hand, PHCP is a domestic corporation located at Special Export Processing Zone, First Cavite Industrial Estate, Barangay Langkaan, Dasmarias, Cavite, Philippines. PHCP is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise under Certificate of Registration No. 95-11 issued on January 24, 1995, as amended and reissued on August 24, 2004. On March 18, 2011, PHCP and Hitachi Cable entered into an Agreement Regarding Hitachi Brand Value where Hitachi Cable granted PHCP a non-exclusive right to use the Hitachi house mark and Hitachi logo ( "Hitachi Brand" ) in English and Japanese forms. The Hitachi Brand shall be used in accordance with Hitachi Graphic Identifications Standards in relation to the shape, size, typeface, indication method, and the like of the Hitachi Brand. In consideration, PHCP will pay royalties to Hitachi Cable equivalent to 0.55 percent (in 2011) of the sales of all products manufactured, assembled or processed by PHCP or its subsidiaries using the Hitachi Brand and all resold products. The rate will increase to 0.70 percent in 2012, 0.85 percent in 2013 and 1.00 percent in 2014. The royalties are payable semiannually after the receipt of invoice by PHCP from Hitachi Cable. The Agreement took effect on April 1, 2011 for an initial term of five years. Based on Invoice (HBVR-PHCP-11-2) issued by Hitachi Cable on June 1, 2012, the royalties payable by PHCP to Hitachi Cable for the period April 1, 2011 to March 31, 2012 amounted to $81,797.00. This was remitted to Hitachi Cable on June 29, 2012 based on the Notice of Debit issued by Mizuho Corporate Bank Ltd. Manila Branch to PHCP on that date. 2 HCEaDI Ruling Relative thereto, please be informed that Article 12 of the Philippines-Japan tax treaty provides: "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 10 per cent of the gross amount of the royalties in all other cases." xxx xxx xxx 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Under Article 12, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 15 percent if the royalties are paid in respect of the use of, or the right to use, cinematograph films and films or tapes for radio or television broadcasting; and (b) 10 percent in all other cases. The term royalties means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. AEDcIH Accordingly, royalties paid by PHCP to Hitachi Cable for the use of the Hitachi Brand, which consists of Hitachi house mark and Hitachi logo in English and Japanese forms, being payments for the use of trademark , and not for cinematograph films and films or tapes for radio or television broadcasting, shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty. Furthermore, under Section 108 (A) of the National Internal Revenue Code of 1997, as amended, the said royalties for the use of trademark in the Philippines are generally subject to value-added tax ("VAT"), to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) . . ." 3 However, since PHCP is PEZA-registered enterprise and entitled to fiscal incentives under Republic Act No. 7916, 4 the Supreme Court ruled in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) , that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. SaCDTA Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis . An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly." Accordingly, since Hitachi Cable , the nonresident lessor of trademark, is not a VAT registered taxpayer, such royalties paid to it by PHCP shall, for purposes of VAT, be exempt from VAT and not subject to zero-percent VAT; in either case, no output VAT is shifted or passed-on to PHCP. 5 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 Footnotes 1. As amended by the Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009 . 2. Since the TTRA was filed on April 13, 2011 and the first royalty payment is made later on June 29, 2012, such royalties paid on that date and thereafter shall be subject to relief (exemption from income tax or reduction of tax) pursuant to Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") , to wit: " SEC. 14. WHEN AND WHERE TO FILE THE TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event ." (Emphasis ours) 3. The VAT rate was increased to 12 percent on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 4. Entitled An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for This Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes , as amended. 5. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended, provides: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties . A zero-rated sale of goods or properties (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale, shall be available as tax credit or refund in accordance with these Regulations." "SEC. 4.109-1. VAT-Exempt Transactions . (A) In general 'VAT-exempt transactions' refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT."