ITAD BIR Ruling No. 013-16

March 4, 2016 ITAD BIR RULING NO. 013-16 Article 11, Philippines-UK tax treaty; Sections 28 (B) (1), 32 (B) (5) and 108 (A) of the NIRC; BIR Ruling No. ITAD-050-11 Standard Chartered Bank Philippines 6788 Ayala Avenue Makati City Attention: Bruce Hathway Chief Financial Officer Gentlemen : This refers to your tax treaty relief application (TTRA) filed on February 21, 2012 in connection with the TTRA previously filed covered by BIR Ruling No. ITAD 050-11 dated February 11, 2011, involving the taxation of royalties to be paid by Standard Chartered Bank Philippines Branch ("Standard Chartered Philippine Branch") to Standard Chartered Strategic Brand Management Limited ("Standard Chartered Strategic") pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-United Kingdom tax treaty") . Basic Facts It is represented that Standard Chartered Strategic is a foreign corporation organized and existing under the laws of the United Kingdom, based on its Memorandum of Association; that Standard Chartered Strategic is a private limited company registered at the Companies Registration Office for England and Wales in the United Kingdom under No. 5618994, and that its registered office is at 1, Aldermanbury Square London, ECV 7SB, United Kingdom; that the primary objects of Standard Chartered Strategic are to carry on all or any of the businesses of strategic managers, holders, franchisees and licensees of intellectual property, and to register, hold, maintain, develop, protect, defend, purchase or otherwise acquire, sell, let and grant trademarks, patents, designs, copyrights, know-how, trade secrets and any other intellectual property rights of whatever kind, or any rights or interests therein, whether in the United Kingdom or elsewhere; to obtain, deal in and exploit any intellectual property rights and any interests in them of whatever kind; and to manufacture, produce, trade and deal in, all articles, machinery, plant, appliances and things capable of being manufactured, produced or traded in by virtue of such rights or interests; to purchase, or otherwise acquire for any estate or interest any property (real or personal) or assets or any concessions, licenses, grants, patents, registered designs, trademarks, copyrights, trade secrets, confidential information or other exclusive or non-exclusive rights of any kind, whether registered or not, and to hold, develop and turn to account and deal with the same in such manner as may be thought fit and to make experiments and tests and to carry on all kinds of research work; that Standard Chartered Strategic is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on May 7, 2009; that, on the other hand, Standard Chartered Philippine Branch is the branch office in the Philippines of Standard Chartered Bank , also a foreign corporation organized and existing under the laws of the United Kingdom, and registered with the SEC under SEC No. F199800007 on April 19, 1998; and that Standard Chartered Philippine Branch is situated at 6788 Ayala Avenue, Makati City, Philippines. It is further represented that on December 18, 2008, Standard Chartered Philippine Branch and Standard Chartered Strategic entered into a License Agreement where Standard Chartered Strategic granted Standard Chartered Philippine Branch a non-exclusive right to use the Masterbrand Intellectual Property for its business in the Philippines beginning January 1, 2008; that Masterbrand Intellectual Property means the legally protectable elements and materials constituting the intellectual property associated with, and related to, the brand STANDARD CHARTERED, in particular, the Masterbrand Trade Marks , 1 and the Ancillary Intellectual Property , 2 and such additions and variations thereto as Standard Chartered Strategic may create during the term of the Agreement; that as consideration, Standard Chartered Philippine Branch will pay royalties to Standard Chartered Strategic on a yearly basis, in arrears, computed as follows: 1. From January 1 to December 31, 2008, one percent of the Total Operating Income 3 of Standard Chartered Philippine Branch for that year; and 2. From January 1 to December 31, 2009, 2010, 2011, 2012, 2013, and 2014, and from January 1 to November 28, 2015, 0.4 percent of the Total Operating Income of Standard Chartered Philippine Branch for the year concerned. that Standard Chartered Strategic reserves the right to review and, if it sees fit, to amend the royalty rates and other financial terms of the Agreement, provided that such amendments will not take effect earlier than three years from the date of effectivity of the Agreement on January 1, 2008; that pursuant to said reservation, Standard Chartered Philippine Branch and Standard Chartered Strategic entered into a Variation Agreement on December 23, 2010 and effective January 1, 2011, amending the License Agreement, as follows: 1) Clause 4.2 is deleted in its entirety, which provides: "4.2 The Licensor (Standard Chartered Strategic) reserves the right to review and amend the Royalty rates, provided that such amendments will not take effect earlier than three years after the Effective Date." 2) The royalty for any particular financial year shall be: a. Applicable Percentage x Total Operating Income for that financial year. b. The "Applicable Percentage" is as follows: SDAaTC i. From January 1 to December 31, 2013, 0.3% of the Total Operating Income of Standard Chartered Philippine Branch for that year; and ii. From January 1, 2014 until expiry or termination of the Agreement, the applicable percentage shall be as advised by Standard Chartered Strategic following a review. that under the License Agreement all payments due under the Agreement may be made by the relevant Standard Chartered Group accounting centre in the Philippines, collectively as agent of Standard Chartered Philippine Branch and other Standard Chartered Group licensees in the Philippines; and that such payments will be made in United States dollars and shall be converted on the basis of the exchange rate as quoted by the Financial Times (London edition) on the due date thereof. It is finally represented based on the notarized Certification by the Authorized Signatory of Standard Chartered Philippine Branch dated May 6, 2010 that the royalties subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling A. On income tax In reply, please be informed that a foreign corporation like Standard Chartered Strategic , whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code of 1997"), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what you invoked for this purpose is the Philippines-United Kingdom tax treaty. Paragraphs 1 and 2, Article 11 thereof provide: "Article 11 Royalties 1. Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films or tapes for television or radio broadcasting. b) in all other cases, 25 per cent of the gross amount of the royalties." Based on the above provisions, royalties arising in the Philippines and paid to a resident of the United Kingdom may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed: (a) 15 percent of the gross amount of the royalties if the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity, or if the royalties are paid in respect of cinematograph films or tapes for television or radio broadcasting, and (b) 25 percent of the gross amount of the royalties in all other cases. Accordingly, inasmuch as Standard Chartered Philippine Branch is not an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity, and that the intangible property that gives rise to the such royalties are not in respect of cinematograph films or tapes for television or radio broadcasting, the royalties to be paid by Standard Chartered Philippine Branch to Standard Chartered Strategic under the License Agreement, as amended by the Variation Agreement , are subject to income tax are at the rate of 25 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 11 of the Philippines-United Kingdom tax treaty. acEHCD B. On value-added tax Finally, the royalties are also subject to value-added tax (VAT) as follows: "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, 4 raise the rate of value-added tax to twelve percent (12%) . . ." This ruling supplements BIR Ruling No. ITAD-050-11 dated February 11, 2011 and 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. Masterbrand Trade Marks refer to the following trademarks: 1. The words "STANDARD CHARTERED"; 2. The words "STANDARD CHARTERED" as used and translated in different languages; 3. The words "STANDARD CHARTERED BANK"; 4. The words "STANDARD CHARTERED SC" in Korean script and the SC Logo as used in Korea; 5. The words "SC STANDARD CHARTERED" in Korean script and the SC Logo (2002 version) as used in Korea; 6. The words "BANCO STANDARD CHARTERED" as used in Latin American countries; 7. The words "CHARTERED BANK"; 8. The SC Logo; 9. The Colored Band Device of Standard Chartered; and 10. The words "HERE FOR GOOD". 2. Ancillary Intellectual Property refers to intellectual property rights and rights under contracts in respect of: 1. Registered company names and trading names incorporating the words "STANDARD CHARTERED" or any other Masterbrand Trade Mark; 2. Unregistered trademarks incorporating, or which are similar to, any Masterbrand Trade Mark; 3. Domain names incorporating the words "STANDARD CHARTERED BANK" or any Masterbrand Trade Mark; 4. Trade dress incorporating any Masterbrand Trade Mark, or any elements of the Masterbrand Trade Marks; 5. Legal Guidelines and policies relating to any of the above; 6. Written or graphic works related to the Masterbrand Trade Marks including: Brand strategies and marketing plans Brand guidelines and specifications Merchandising Proprietary typographical styles Media and advertising materials Market research Images and photographs 7. Key brand Commercialization Agreements, including Co-branding Agreements, and Sponsorships; 8. Manuals, standard procedures or other know-how relating to any aspect of the Masterbrand Intellectual Property; and 9. Website designs and or related documentation which includes (or is similar to) any Masterbrand Trade Mark. 3. Total Operating Income means net interest income, plus net fees and commission income, plus net trading income and other operating income. 4. The VAT rate was increased to 12 percent beginning 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.