ITAD BIR Ruling No. 046-15

March 25, 2015 ITAD BIR RULING NO. 046-15 Article 12 Philippines-Japan tax treaty, as amended Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Makati City Gentlemen : This refers to your tax treaty relief application filed on March 30, 2011 requesting confirmation that royalties paid by Panasonic System Networks Philippines Corporation ("Panasonic Networks Philippines") to Panasonic Corporation ("Panasonic") are subject to income tax at the rate of 10 percent pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") as amended by protocol. 1 Facts Panasonic is a foreign corporation resident of Japan based on its Articles of Incorporation and Certificate of Status of Taxable Person issued by the Kadoma Taxation Office on March 23, 2011. It is located at 1006 Oaza Kadoma, Kadoma, Osaka, Japan. Panasonic is engaged in the manufacture and sale of electric machinery and equipment, communications and electronic equipment, as well as lighting equipment; gas, kerosene and kitchen equipment, as well as machinery and equipment for building and housing; machinery and equipment for office and transportation, as well as sales activities; medical, health and hygienic equipment, apparatus and materials; and optical and precision machinery and equipment, among others. 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 8, 2011. On the other hand, Panasonic Networks Philippines is a domestic corporation located at Building 2, 102 Laguna Boulevard, Laguna Technopark, Sta. Rosa City, Laguna, Philippines. Panasonic Networks Philippines is originally known as Panasonic Communications Philippines Corporation, then as Panasonic System Networks Philippines Corporation, and now as Panasonic Precision Devices Philippines Corporation. It is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise and entitled to fiscal incentives under Republic Act No. 7916. 2 On February 22, 2011, Panasonic and Panasonic Networks Philippines entered into a Trademark License Agreement where Panasonic granted Panasonic Networks Philippines a non-exclusive and nontransferable license to use trademarks in connection with the manufacture and sale by Panasonic Networks Philippines of Panasonic products. The use of trademarks means and limited only to the act of affixing the trademarks on the products and the packaging thereof, and making the trademarks visible on catalogue, leaflets, sign boards and other advertising media and structures in the normal commercial advertising activities. As of the date of the Agreement, trademarks means the word 'Panasonic' used on the following manufactured products: optical disc drives; plain paper copiers; multifunction products (printer, scanner and facsimile machine in one unit having network capability); consumables and option units for these products; scanner and facsimile machine in one unit having network capability; and microprocessor unit cooling fans. In consideration, Panasonic Networks Philippines will pay Panasonic a trademark license fee (royalties) equivalent to 1 percent of sales price of the products bearing the trademarks as invoiced to customers. The royalties are computed semiannually: from April 1 to September 30 and from October 1 to March 31, and payable within 25 days after each period. The royalties are payable in United States dollars. The Agreement took effect on January 1, 2011 and will remain as such until December 31, 2020. The parties may extend the Agreement prior to its expiration. cAISTC Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended ("Tax Code"), income derived in the Philippines by a foreign corporation not engaged in trade or business in the Philippines is 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: * 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 income is 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." For this purpose, you invoke paragraphs 1 and 2, Article 12 of the amended Philippines-Japan tax treaty, which provide: " Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting 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 in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 10 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx 4. 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 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." Under this article, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 15 percent if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, and (b) 10 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. cDAEIH Accordingly, since royalties paid by Panasonic Networks Philippines to Panasonic for the use of trademarks in connection with the manufacture and sale by Panasonic Networks Philippines of Panasonic products are not for the use of, or the right to use, cinematograph films and films or tapes for radio or television broadcasting, such royalties are subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (b), Article 12 of the amended Philippines-Japan tax treaty. Furthermore, the royalties for the use of trademark in the Philippines are generally subject to value-added tax ("VAT") under Section 108 (A) of the amended Tax Code, thus: "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%) . . ." However, since Panasonic Networks Philippines is a PEZA-registered enterprise, the Supreme Court, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005), ruled that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly." Accordingly, since Panasonic, the nonresident lessor of the intangible property, is not a VAT-registered taxpayer, such royalties paid to it by Panasonic Networks Philippines are, for VAT purposes, treated as exempt from VAT rather than subject to zero-rated VAT. In either case, no output VAT is shifted or passed-on to Panasonic Networks Philippines. 4 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. As amended by the Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009. 2. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for This Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes, as amended. 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. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005), as amended, provides: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. A zero-rated sale of goods or properties (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale, shall be available as tax credit or refund in accordance with these Regulations." "SEC. 4.109-1. VAT-Exempt Transactions. (A) In general. 'VAT-exempt transactions' refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT."