ITAD BIR Ruling No. 022-16

March 15, 2016 ITAD BIR RULING NO. 022-16 Article 12, Philippines-Singapore tax treaty Century Pacific Agricultural Ventures, Inc. Suite 505 Centerpoint Building Julia Vargas, Ortigas Center, Pasig City Attention: Mr. Marcelino C. Mijares, Jr. Senior Manager Gentlemen : This refers to your tax treaty relief application filed on June 3, 2014 requesting confirmation that royalties paid by Century Pacific Agricultural Ventures, Inc. ("Century") to All Market Singapore Pte. Ltd. ("All Market") are subject to income tax at the rate of 15 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . Facts All Market is a corporation organized and existing under the laws of Singapore based on its Memorandum and Articles of Association. All Market is a resident of Singapore based on its Certificate of Residence issued by the Inland Revenue Authority of Singapore on April 15, 2014. 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 April 30, 2014. On the other hand, Century is a domestic corporation duly organized and existing under Philippine laws. Century is an enterprise registered with the Board of Investments (BOI) and engaged in a non-pioneer area of investment. Century is registered as an export producer of processed coconut fruit products. On May 20, 2014, All Market and Century entered into a Trademark Licensing Agreement ("TLA") where All Market granted Century , for a term of five (5) years (inclusive of a three (3) year lockdown period), an exclusive, and non-transferrable license over the Trademarks (Vita Coco) , to be used for the sole purpose of manufacturing, processing, packaging and sale of the Products (Vita Coco Coconut Water (Straight) 330mL and 1L pack) in the Philippines; and an exclusive license over the Trademarks and the right to grant Distributor 1 an exclusive and non-transferrable sub-license over the Trademarks, to be used for the sole purpose of distribution and resale of the Products in the Philippines. In consideration, Century shall pay royalties to All Market equivalent to 24.50% (Royalty Fee of 18.5% for All Market plus 6% Reduced Distribution Fee for the first two years) of the quarterly revenues, payable within seven (7) days after the receipt by All Market of the Royalties Note provided by Century within fifteen (15) days of the end of each quarter of the year. Ruling In reply, please be informed that the royalties paid to All Market , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent of the gross amount thereof. Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, provides: "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, such royalties may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation in the Philippines. 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: 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" Thus, you invoked Article 12 of the Philippines-Singapore tax treaty which provides: "Article 12 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 law of that State, but, if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; (Underscoring supplied) b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; c) in all other cases, 25 percent of the gross amount of the royalties. 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 Article 12, royalties arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines at a rate not to exceed (a) 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting, (b) exempt if the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, and (c) 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, while Century is registered with the BOI, it is not represented that Century is engaged in preferred areas of activities as required by the Philippines-Singapore tax treaty. In view of the foregoing, All Market is not qualified for the 15 percent preferential tax rate under paragraph 2 (a), Article 12 of the Philippines-Singapore tax treaty. However, since the royalties paid by Century to All Market under the Agreement are being payments for the grant of license and know-how in connection with the manufacture, use and/or sale of Products in the Philippines, and not in respect of cinematographic films or tapes for television or broadcasting, such royalties paid to All Market shall be subject to income tax at the rate of 25 percent , pursuant to paragraph 2 (c), Article 12 of the Philippines-Singapore tax treaty. With regard to the imposition of VAT on royalties paid by Century to All Market , Section 108 (A) of the Tax Code of 1997, as amended, provides 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, 2 raise the rate of value-added tax to twelve percent (12%). . ." The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right." Accordingly, Century shall withhold VAT on the royalties at the rate of 12 percent before remitting to All Market. Century shall use BIR Form 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 payment shall serve as a documentary evidence for Century's claim for input tax on the royalties. Otherwise, Century may treat such VAT as an asset or expense, whichever is applicable. cEaSHC 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. "Distributor" means such party which has entered into an agreement with Century in relation to the sale and distribution of the Products within the Area to customers. 2. 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. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.