ITAD BIR Ruling No. 016-16

March 14, 2016 ITAD BIR RULING NO. 016-16 Article 13 (Royalties), Philippines-Thailand tax treaty; BIR Ruling No. ITAD-305-12 Salvador and Associates Attorneys-at-Law 815-816 Tower One and Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Mary Rose V. Pascual Partner Gentlemen : This refers to your tax treaty relief application filed on December 23, 2013, requesting confirmation that licensing fees paid by Lyceum of the Philippines University-Manila ("Lyceum-Manila"), Lyceum of the Philippines University-Batangas ("Lyceum-Batangas") and Lyceum of the Philippines University-Laguna ("Lyceum-Laguna") (collectively, the "Lyceum Group" ) to Dusit Thani Public Company Ltd. ("Dusit Thani") are subject to preferential rate of income tax pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Thailand tax treaty") . Facts Dusit Thani is a corporation organized and existing under the laws of Thailand and is a resident thereof based on its Articles of Association and on the Certificate of Residence issued by the Revenue Department of Thailand on January 16, 2014. Dusit Thani is the ultimate-parent of Dusit Thani College , a privately-owned higher educational institution in Thailand which offers various bachelor degree programs in kitchen and restaurant management, hotel management, tourism management, and variety of short courses. Dusit Thani is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on January 9, 2014. On the other hand, Lyceum-Manila, Lyceum-Batangas and Lyceum-Laguna are educational institutions duly organized and existing under the laws of the Philippines. On December 3, 2008 , the Lyceum Group and Dusit Thani entered into a Licensing Agreement ("Agreement") where Dusit Thani granted the Lyceum Group the right to use Dusit Thani's Standard Courses Manuals, Curricula, Course Materials, Trademarks (including Dusit Thani College ) and Know-How. The Lyceum Group has tied up with Dusit Thani for a joint program for the courses in order for Lyceum Group graduates to be more globally competitive and immediately employable by Dusit Thani and other international hotel chains, cruise lines and key players in the hospitality industry. In consideration, the Lyceum Group will pay a licensing fee to Dusit Thani equivalent to one (1) percent of all tuition fees received by the Lyceum Group arising from the enrollment in the courses excluding any miscellaneous fees such as laboratory fees and consumable fees if charged separately from the tuition fees. The fee is payable within 30 days after the close of each semester and summer term and will be paid in equivalent United States dollars by bank transfer. The fee will be based on all freshmen students who enrolled in the courses beginning the first semester of the academic year 2009-2010. The Agreement took effect on December 3, 2008 and will be in effect for fifteen years from the first academic year. Both parties will review the accomplishment of the courses after every five years. On October 1, 2013, Lyceum Group and Dusit Thani entered into an Amended Licensing Agreement ("Amended Agreement") pursuant to the term indicated in the original Agreement which provides for a review of the accomplishment of the Courses at the end of every five years to ensure that both the Lyceum Group and Dusit Thani have mutually benefitted from the collaboration. Both parties mutually agreed to amend certain provisions of the Agreement . Based on the Amended Agreement, Lyceum Group will now pay a licensing fee to Dusit Thani equivalent to two and a half (2 1/2) percent of revenues by Lyceum Group for the use of the following: Dusit Standard Courses Manuals covering the qualities, standards, specifications, and other material aspects of its educational activities. An English Language Dusit Curricula and Course Materials Dusit Trademarks Know-How CAIHTE The fee is payable within 60 days after 30 days after the close of each semester and summer term and will be paid in equivalent United States dollars by bank transfer. The Lyceum Group shall make the first payment to Dusit Thani within sixty (60) days after the close of the first semester 2013-2014 which dates shall not be later than the last business day of December 2013. Finally, the issue or transaction subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Comptroller of Lyceum Group on December 16, 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the Tax Code, royalties paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)". However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: aScITE "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." With respect to a treaty, you invoke the Philippines-Thailand tax treaty. Paragraphs 1, 2 and 3, Article 13 thereof provide: "Article 13 Royalties 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that 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: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; or (ii) by an enterprise under the promotion of the Board of Investments of Thailand; or (iii) in respect of cinematographic films or tapes for television or broadcasting. b) 25 per cent of the gross amount of the royalties in all other cases. 3. 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 cinematographic films or tapes for television or 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 paragraphs 1 and 2 above, royalties arising in the Philippines and paid to a resident of Thailand may be taxed in the Philippines at a rate not to exceed: (a) 15 percent if the royalties are paid by an enterprise registered with the Board of Investments and engaged in preferred areas of activities, or if the royalties are paid in respect of cinematographic films or tapes for television or broadcasting; and (b) 25 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 cinematographic films or tapes for television or 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 ( "know-how" ). Accordingly, with respect to the licensing fee for the use of the Trademarks, the Dusit Thani Brand, the Know-how and the Course Curricula as defined in the Licensing Agreement, this fee constitutes payments or royalties for the use of trademark (the Trademarks and the Dusit Thani Brand), know-how (the Know-how) and copyright of literary, artistic or scientific work (Course Curricula). Accordingly, since the Lyceum Group , the payor of the royalties, is not registered with the Board of Investments and engaged in preferred areas of activities, and since the royalties are not paid in respect of cinematographic films or tapes for television or broadcasting, the licensing fees paid by the Lyceum Group to Dusit Thani and made on n pursuant to the amended agreement are subject to income tax at the rate of 25 percent , pursuant to paragraph 2 (b), Article 13 of the Philippines-Thailand tax treaty. Finally, under Section 108 (A) of the Tax Code, the fees and royalties in question, being payments for the use of intangible properties (know-how, trade mark, design or model, plan, secret formula or process) in the Philippines, are 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 selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%). . ." HEITAD Accordingly, Lyceum Group shall withhold VAT on the fees and royalties at the rate of 12 percent (beginning February 1, 2006 and thereafter) before remitting them to Dusit Thani . Lyceum Group shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for Lyceum Group claim of input tax on the fees and royalties. Otherwise, Lyceum Group may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding was made. 2 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. 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. 2. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, as Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) , which provides: "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense', whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.