ITAD BIR Ruling No. 026-14

April 4, 2014 ITAD BIR RULING NO. 026-14 Articles 13 (Royalties) and 23 (Relief from Double Taxation), Philippines-United States of America tax treaty; Articles 12 (Royalties) and 23 (Relief from Double Taxation), Philippines-United Arab Emirates tax treaty Romulo Mabanta Buenaventura Sayoc and De Los Angeles Attorneys at Law 30th Floor, Citibank Tower 8741 Paseo de Roxas Street Makati City Attention: Atty. Jayson L. Fernandez Partner Atty. Carrie Bee C. Hao Senior Associate Gentlemen : This refers to your tax treaty relief application filed on November 22, 2011 requesting confirmation that royalties paid by Century City Development Corporation ("Century City Development") to Trump Marks Philippines LLC ("Trump Marks Philippines") are subject to income tax at the rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty") . Facts Trump Marks Philippines is a foreign corporation and a resident of the United States based on its Certificate of Formation filed at the State of Delaware in the United States on February 29, 2008, and Certificate of Residence issued by the Internal Revenue Service of the United States on January 21, 2009. Trump Marks Philippines is located at 725 Fifth Avenue, New York, New York, United States. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on June 25, 2008. On the other hand, Century City Development is a domestic corporation located at 21st Floor, Pacific Star Building, Sen. Gil J. Puyat Avenue corner Makati Avenue, Makati City, Philippines. CAcIES On May 8, 2008, Mr. Donald J. Trump and Trump Marks Philippines entered into an Assignment Agreement where Mr. Trump assigned to Trump Marks Philippines his right, title and interest on the use of the Trump Mark in the Philippines. Mr. Trump is a world-renowned builder and developer of luxury residential real estate, among other things, who enjoys the highest reputation in these fields. He owns the Trump Mark which consists of names and marks TRUMP and Trump Tower as used on or in connection with a variety of goods and services such as real estate services, construction and development and listing, leasing, and managing of commercial and residential properties. On May 15, 2008, Century Luxury Properties, Inc. ("Century Luxury Properties") and Trump Marks Philippines entered into a License Agreement where Trump Marks Philippines granted Century Luxury Properties a non-exclusive, non-assignable and non-transferable right to use the Trump Mark on the construction of a first class, high-rise, luxury residential condominium building owned by Century City Development , and located at Kalayaan Avenue and Salamanca Street, Makati City, Philippines. The building will be known as Trump Tower Manila and covered by Transfer Certificate of Title No. 224339 issued by the Register of Deeds of Makati City. The building has a floor area of approximately 3,989 square meters and will be built in a land with an area of approximately 30,718 square meters. The building will consist of not more than 67 stories and will contain residential units, parking units, and amenity packages such as a spa, a fitness center/health club, and a swimming pool. The Agreement was amended on May 29, 2009. The amended Agreement took effect on May 15, 2008 and will continue in effect indefinitely. The amended Agreement complies with the provisions of the Intellectual Property Code on voluntary licensing under Certificate of Compliance No. 5-2008-00058 issued by the Intellectual Property Office on September 28, 2011 and valid since May 15, 2008. CAcIES On July 25, 2011, Century Luxury Properties and Century City Development entered into a Deed of Assignment and Assumption of Obligations where Century Luxury Properties transferred to Century City Development its rights and obligations under the amended License Agreement. In consideration for the use of the Trump Mark, Century Luxury Properties (as succeeded by Century City Development ) will pay the following license fees to Trump Marks Philippines : License Fee (in US Dollars) Timing and Manner of Payment Up-Front Fee 1,000,000.00 Upon signing of the Agreement. 1,000,000.00 On or before June 2, 2009. 1,000,000.00 On or before the construction of the building. Extension Fee 50,000.00 Every month, beginning on the 24th month following the construction of the building. Gross Sales Fee 8 percent of the gross selling price of Last business day of the week when the each condominium sold sale is consummated. 8 percent of the gross selling price of Last business day of the week when the each parking lot sold sale is consummated. 8 percent of the gross selling price of Last business day of the week when the each other unit sold such as portions of sale is consummated. commercial space, boat slips, storage spaces, cabanas and similar areas and all additional amenities or components (including memberships) Commercial Component Rent Fee 8 percent of the gross rent (base rent plus Every month, within five days from additional rent including percentage rent) receipt of the rent from the tenant. of each other unit rented Based on the Sworn Statement issued by Century City Development on September 25, 2013, the License Agreement took effect on May 15, 2008 and the Deed of Assignment and Assumption of Obligations took effect on July 25, 2011. These agreements remain effective to date and the parties have not exercise their right to terminate either agreement. Based on the Certification issued by Century City Development on July 29, 2013, the Telegraphic Transfer Application Forms submitted to Banco de Oro Unibank, Inc. ("BDO"), 1 the Customer Credit Transfers issued by BDO, and Payment Order Forms submitted to Deutsche Bank AG Manila Branch ("Deutsche Bank") , 2 the royalties were paid by Century City Development to Trump Marks Philippines as follows: Date of Transaction Amount Remitting Receiving Royalty Remittance Number (in US Bank Bank Month Dollars) Dec. 7, 2011 0356-1101986 8,209.31 BDO Oct. 2011 Jan. 9, 2012 0356-1200032 27,217.21 BDO Nov. 2011 Feb. 10, 2012 0356-1200252 79,381.81 BDO Dec. 2011 Mar. 7, 2012 0356-1200410 36,671.45 BDO Jan. 2012 Apr. 10, 2012 0356-1200589 44,352.60 BDO Feb. 2012 May 16, 2012 0356-1200859 57,844.70 BDO Mar. 2012 Jun. 4, 2012 0356-1201044 21,610.62 BDO Apr. 2012 Jul. 3, 2012 0356-1201330 31,217.51 BDO Capital One May 2012 Jul. 31, 2012 0356-1201561 37,580.36 BDO Bank Jun. 2012 Sep. 4, 2012 0356-1201773 29,855.93 BDO New York Jul. 2012 Oct. 9, 2012 - 35,621.58 Deutsche Bank Aug. 2012 Nov. 12, 2012 0356-1202372 43,507.20 BDO Sep. 2012 Dec. 11, 2012 0356-1202662 56,390.93 BDO Oct. 2012 Jan. 2, 2013 - 117,850.05 Deutsche Bank Nov. 2012 Feb. 7, 2013 0356-1300358 82,237.50 BDO Dec. 2012 Apr. 1, 2013 0356-1300862 28,564.82 BDO Jan. 2013 Apr. 5, 2013 - 17,474.61 Deutsche Bank Feb. 2013 May 10, 2013 - 25,605.41 Deutsche Bank Mar. 2013 Jun. 6, 2013 0356-1301537 116,469.44 BDO Apr. 2013 Ruling In reply, please be informed that under 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") , any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division of this Bureau before the first taxable event subject of the TTRA, to wit: TAacCE " SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Form Nos. 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. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis ours) In view of the foregoing, since the License Agreement that gives rise to the payment of royalties by Century Luxury Properties to Trump Marks Philippines is in effect on May 15, 2008, and the Deed of Assignment assigning to Century City Development the obligation of Century Luxury Properties to pay royalties to Trump Marks Philippines is in effect on July 25, 2011, and since royalties are computed every month from the time of the effectivity of the License Agreement, this Office hereby DENIES relief on royalties paid to Trump Marks Philippines on or before the filing of the relevant TTRA on November 22, 2011 , pursuant to Section 14 of RMO 72-2010. Accordingly, these royalties are subject to regular income tax rate of 30 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, to wit: aCSEcA "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, royalties paid to Trump Marks Philippines on November 23, 2011 and thereafter are subject to relief under paragraph 2 (b) (iii), Article 13 of the Philippines-United States tax treaty, to wit: "Article 13 Royalties 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. CSEHcT 2. However, the tax imposed by that other Contracting State shall not exceed xxx xxx xxx b) In the case of the Philippines, the least of: xxx xxx xxx (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. 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 films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term 'royalties' also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof." Under Article 13, royalties arising in the Philippines and paid to a resident of the United States are subject to the lowest rate of Philippine income tax that may be imposed on royalties of the same kind and paid to a resident of a third State under similar circumstances (also known as most-favored-nation treatment or MFN treatment ). HCIaDT With respect to MFN treatment, the Supreme Court, in Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals (G.R. No. 127105 dated June 25, 1999) ("SC Johnson case") , had required two conditions for such treatment to apply. First, royalties arising in the Philippines and paid to a resident of the United States must be of the same kind as those derived in the Philippines by a resident of a third State and where such are subject to an MFN treatment under the applicable tax treaty between the Philippines and the third State. A survey of existing tax treaties to date discloses an MFN rate of 10 percent . Second, royalties paid to the United States resident must be paid under similar circumstances vis--vis royalties paid to the third State resident. In the said ruling where the third State in question is Germany, the Court declared that royalties paid to a United States resident and those paid to a German resident are not paid under similar circumstances since the United States, at most, allows a foreign tax credit (actual Philippine income tax levied) of 10 percent on royalties, as against Germany, which allows a foreign tax credit (actual Philippine income tax levied plus additional tax-sparing credit) of 20 percent on royalties. The pertinent portion of the SC Johnson case reads: "The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the 'most favored' among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12(2)(b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most favored nation clause to grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. DTESIA We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances ." (Emphasis ours) For this purpose, The Agreement between the Government of the Republic of the Philippines and the Government of the United Arab Emirates for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital ("Philippines-United Arab Emirates or UAE tax treaty") effective January 1, 2009 is applicable herein. With respect to the first condition , under paragraphs 1, 2 and 3, Article 12 of the Philippines-UAE tax treaty, royalties for the use of, or the right to use, trademark and other intangible properties are subject to income tax at a single rate of 10 percent , to wit: "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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties. The competent authorities of the Contracting States shall, by mutual agreement, settle the mode of application of this limitation. AIaDcH 3. The term 'royalties' as used in this Article means payment 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 and films or tapes for television or radio 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." With respect to the second condition , under paragraph 1, Article 23 of the Philippines-United States tax treaty and paragraph 2, Article 23 of the Philippines-UAE tax treaty, the foreign tax credit or deduction which the United States and UAE allow their residents with respect to income arising in the Philippines (except dividends paid to a United States resident) and subjected to income tax therein is limited to the actual amount of Philippine income tax levied on such income, to wit: "Article 23 Elimination of Double Taxation xxx xxx xxx 2. In the case of the United Arab Emirates, double taxation shall be eliminated as follows: Where a resident of the United Arab Emirates derives income which in accordance with the provisions of this Agreement, may be taxed in the Philippines, the United Arab Emirates shall allow as a deduction from tax on income of that person an amount equal to the tax on income paid in the Philippines ." ESHAIC " Article 23 Relief from Double Taxation Double taxation of income shall be avoided in the following manner: 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year . For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid or accrued to the Philippines, the taxes referred to in paragraphs 1(b) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes ." (Emphasis ours) Considering an MFN rate of 10 percent under Article 12 of the Philippines-UAE tax treaty, this is the amount of foreign tax credit that UAE will allow its residents who derive royalties in the Philippines. Since the same amount of foreign tax credit will be allowed by the United States on royalties subjected to MFN treatment in the Philippines which is the actual amount of Philippine income tax levied on the income, it follows that royalties paid to a UAE resident and those paid to a United States resident are paid under similar circumstances . In view of the foregoing, the license fees or royalties for the use of the Trump Mark paid by Century City Development to Trump Marks Philippines on November 23, 2011 and thereafter are subject to income tax at the rate of 10 percent , pursuant to paragraph 2 (b) (iii), Article 13 of the Philippines-United States tax treaty, in relation to paragraph 2, Article 12 of the Philippines-United Arab Emirates tax treaty. IcaEDC Finally, under Section 108 (A) of Tax Code, as amended, the said license fees or royalties for the use of trademark 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: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 3 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;" Relative thereto, Century City Development (the current licensee) and Century Luxury Properties (the previous licensee) shall withhold VAT on the royalties at the rate of 12 percent before remitting them to Trump Marks Philippines. Century City Development and Century Luxury Properties shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If they are VAT-registered taxpayers, the duly filed BIR Form No. 1600 and accompanying proof of payment shall serve as documentary substantiation for their claim of input VAT on the royalties; otherwise, they may treat the VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 4 cHSIDa 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. Located at BDO Corporate Center, 7899 Makati Avenue, Makati, Philippines. 2. Located at 26th Floor, Ayala Tower One, Ayala Triangle, Makati City, Philippines. 3. 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. 4. 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." Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.