ITAD BIR Ruling No. 017-16

March 14, 2016 ITAD BIR RULING NO. 017-16 Article 12, Philippines-Netherlands tax treaty Sycip Salazar Hernandez and Gatmaitan Attorneys-at-Law SyCipLaw Center 105 Paseo de Roxas Makati City Attention: Mr. Hector M. De Leon Jr. Ms. Hiyasmin H. Lapitan Ms. Rosalyn S. Co-Uy Gentlemen : This refers to your tax treaty relief application filed on January 28, 2014 requesting confirmation that royalties paid by Solar Entertainment Corporation ("Solar") to Universal Studios International B.V. ("Universal") are subject to income tax at the rate of 15 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). caITAC Facts Universal is a foreign corporation organized and existing under the laws of the Netherlands and is a resident thereof based on the Commercial Register Extract of the Chamber of Commerce of the Netherlands and Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on November 26, 2013. It 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 19, 2013. On the other hand, Solar is a domestic corporation organized and existing under Philippine laws. On January 1, 2014, Solar and Universal entered into a Free & Basic Content License Agreement ("License Agreement") where Universal granted Solar a limited license to transmit in its entirety the Licensed Product 1 via Free Television (excluding Talk Shows) and Basic Television during the applicable license period on its respective Licensed Services 2 in the Authorized Language 3 in the Philippines. In consideration, Solar shall pay Universal license fees for Licensed Product licensed for each contract year a sum equal to the greatest of the minimum guarantee for that contract year and total license fees applicable for all Licensed Product licensed for that contract year. All license fees apply to Licensed Product licensed for Contract Year 1. All license fees (including minimum guarantee) shall increase by 4 percent in the Contract Year 2 and for each successive Contract Year thereafter and for the Licensed Product licensed for each subsequent year under Solar's run-of-series obligation, such license fees shall also increase by 3 percent for each successive year. All such license fee increases (including the minimum guarantee) shall be cumulative. Payment of all license fees shall be due on the first day of each Contract Year and shall be billed and paid in twelve consecutive equal monthly installment payments beginning not later than the first day of each calendar month for any Licensed Product licensed for the Contract Year. The License Agreement took effect on January 1, 2014 and will be valid for 4 years unless terminated. Universal shall have a unilateral right to terminate the term of the agreement effective as of December 31, 2015 by sending notice to Solar on or before that date. 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: "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-Netherlands tax treaty. Paragraphs 1, 2 and 4, Article 12 thereof provide: "Article 12 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the 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) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx 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 cinematograph films or tapes for radio or television broadcasting, any patent, trademark, 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 the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in the Philippines, and (b) 15 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 ("know-how") . Accordingly, since Solar , the payor of the minimum guarantee fee and license fees for the use of copyrighted materials under the License Agreement , is not registered with the Board of Investments and engaged in preferred areas of activities, such royalties paid to Universal shall be subject to income tax at the rate of 15 percent , pursuant to paragraph 2 (b), Article 12 of the Philippines-Netherlands tax treaty. Finally, under Section 108 (A) of the Tax Code, the minimum guarantee fee and the license fees 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, 4 raise the rate of value-added tax to twelve percent (12%). . ." Accordingly, Solar shall withhold VAT on the fees and royalties at the rate of 12 percent (beginning February 1, 2006 and thereafter) before remitting them to Universal. Solar 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 Solar's claim of input tax on the fees and royalties. Otherwise, Solar 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. 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. "Licensed Products" means copyrighted television programs and films of Universal which include First-Run Feature Films, Library Feature Films, First Run Non-Scripted Television Series, News Programming, and Talk Shows. 2. Licensed Services: Basic TV: Second Avenue-2nd AVENUE, Solar TV-Solar News Channel, Solar Sports, The Game Channel, Travel Channel and JACKTV, each a linear Basic Cable television channel wholly owned and directly operated by Solar (collectively, the Basic Cable Licensed Service") and the Free Television Licensed Service and collectively with Basic Cable Licensed Service, the Licensed Services. Free TV: The "Free Television Licensed Services" shall be Entertainment Central ETC, Second Avenue 2nd Avenue and Jack City, each a free linear terrestrial television channel wholly owned and directly operated by Solar. 3. "Authorized Language" means the English language. 4. 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. 5. 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.