ITAD BIR Ruling No. 028-14

April 14, 2014 ITAD BIR RULING NO. 028-14 Article 12 (Royalties) Philippines-Netherlands tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: Lucil Q. Vicerra Authorized Representative Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on 15 August 2012 requesting confirmation that royalties paid by Nike Philippines, Inc. ("Nike-Philippines") to Nike European Operations Netherlands B.V. ("Nike-Netherlands") 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"). Facts It is represented that Nike-Netherlands is a corporation organized and existing under the laws of the United Kingdom of the Netherlands with business address at mw. E. van Gompel, Collosseum 1, 1213 NL Hilversum based on its Deed of Incorporation and on the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on 02 January 2012. Nike-Netherlands 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 29 June 2012. On the other hand, Nike-Philippines is a domestic corporation with business address at 10th Floor, Marajo Tower 312, 26th West corner 4th Avenue, Bonifacio Global city 1463 Taguig. It is represented that on 27 July 2012, Nike-Philippines entered into a sublicensing agreement with Nike-Netherlands to take effect on 01 August 2012 based on the consularized and notarized "CBF/Manchester United Agreement" (" sublicensing agreement "). The sublicensing agreement was executed to give Nike-Philippines permission to use rights in connection with its business in the Philippines. Nike-Netherlands grants Nike-Philippines the following rights in the sublicensing agreement : "2. RIGHTS AND BENEFITS 2.1 Subject to the conditions set forth in this Agreement, NIKE hereby grants to Participating Company, for the term of this Agreement: DTEIaC 2.1.1 a non-transferable, non-exclusive and worldwide license to manufacture or subcontract for the manufacture of (i) CBF/Manufacture United Products, and (ii) Brand Products that incorporate one or more of the Rights (hereinafter "Co-Branded Products") provided that Participating Company continues to sell CBF/Manufacturer United Products and Co-Branded Products only in the Territory; 2.1.2 a non-transferable and non-exclusive license to (i) sell CBF/Manchester United Products in the Territory, and (ii) use the Rights in the Territory in connection with the marketing, demand creation and sale of CBF/Manchester United Products. 2.2 Subject to the conditions set forth in this Agreement, NIKE hereby grants to Participating Company from August 1, 2012 until the end of the Agreement Term, a non-transferable and exclusive license to (i) sell Co-Branded Products in the Territory, and (ii) use the Rights in the Territory in connection with the marketing, demand creation and sale of Co-Branded Products." In consideration, Section 4 of the sublicensing agreement provides that Nike-Philippines shall pay royalties to Nike-Netherlands as follows: "4. REMUNERATION. 4.1 In consideration of the performance by NIKE of its obligations under this Agreement, Participating Company shall pay a fee to NIKE computed as follows: 4.1.1 two percent (2%) of Participating Company's Net Category Revenues, excluding revenues for sales made by Participating Company to other members of the NIKE group; plus 4.1.2 one-fourth of one percent (.25%) of Participating Company's Net Brand Revenues, excluding revenues for sales made by Participating Company to other members of the NIKE Group. Such separate components of the fee are cumulative and shall not be reduced because of the inclusion of certain revenues in both Net Category Revenues as well as Net Brand Revenues. xxx xxx xxx 4.4 All payments required under this Agreement shall be accrued each fiscal month based on sales by Participating Company during the immediately preceding fiscal month and charged to Participating Company. Participating Company shall pay to NIKE such charges no later than the last calendar day of the month following the month in which the charge is received. For purposes of Participating Company's obligation to make payments to NIKE pursuant to this Agreement, Participating Company shall be deemed to have sold Brand Products as such time as Participating Company has delivered such Brand Products, along with an invoice, to the purchaser." IECcaA It is represented that on 19 September 2012, Nike-Philippines made its first royalty payments to Nike-Netherlands pursuant to the sublicensing agreement in the amount of Php1,197,489.45 based on the notarized Sworn Statement of the Commercial Director of Nike-Philippines. As per notarized Certification and Debit Advice issued by Citibank N.A. Makati, Nike-Philippines made an outward remittance of USD814,804.00 in favor of Nike-Netherlands on 19 September 2012. It is finally represented that the royalties 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 Commercial Director of Nike-Philippines on 29 June 2012. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" NIRC of 1997 "), as amended, royalty payments made to Nike-Netherlands is subject to income tax at the rate of 30 percent, thus: "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 NIRC of 1997, these royalties may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 32. Gross Income. cIADaC 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." For this purpose, you invoke the Philippines-Netherlands tax treaty. Article 12 (2) (b), thereof provides: "Article 12 Royalties 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." Based on the foregoing, royalty payments made by a Philippines enterprise to a Netherlands enterprise may be subject to the preferential tax rate of (i) 10% of the gross amount of royalties if the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in the Philippines; or (ii) 15% of the gross amount of royalties in other cases. Being that Nike-Philippines do not appear to be registered or engaged in preferred areas of activities in the Philippines, royalty payments made by Nike-Philippines to Nike-Netherlands pursuant to the sublicensing agreement are subject to the preferential rate of 15%. (BIR Ruling ITAD No. 040-2010 dated 21 September 2010) Moreover, the said royalty payments by Nike-Philippines to Nike-Netherlands shall be subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code, as amended, which provides as follows: "Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. DEHcTI (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of the 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, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including . . . . 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; xxx xxx xxx" Accordingly, Nike-Philippines , being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT on such royalty before making any payment to Nike-Netherlands. In remitting the VAT withheld, Nike-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Nike-Philippines upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Nike-Philippines is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of goods or properties purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, Nike-Philippines is required to issue the Certificate of Final Income Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Nike-Netherlands upon its request and the fourth copy to be retained by Nike-Philippines as its file copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07); Section 4.114 (d), as amended by RR 28-03]. 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.