ITAD BIR Ruling No. 059-14

June 9, 2014 ITAD BIR RULING NO. 059-14 Article 12 (2) (b), Philippines-Japan tax treaty, as amended Manabat Sanagustin & Co., CPAs The KPMG Center 9/F 6787 Ayala Avenue Makati City 1226 Attention: Maria Myla S. Maralit Partner, Tax Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on August 28, 2013, on behalf of Wacoal Corp. ("Wacoal-Japan") , requesting confirmation that the royalty payments by Philippine Wacoal Corporation ("Wacoal-Phil") to Wacoal-Japan are subject to 10 percent preferential final withholding tax rate pursuant to Article 12 of the amended 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") . It is represented that Wacoal-Japan is a corporation organized and existing under the laws of Japan with principal address at 29 Nakajima-cho, Kisshoin, Minami-ku, Kyoto, Japan, and is a resident thereof within the meaning of Philippines-Japan tax treaty based on the Residence Certificate issued on July 17, 2013 by the District Director of Shimogyo Tax Office; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated July 16, 2013; and that, on the other hand, Wacoal-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 6788 Makati Sky Plaza Building, Ayala Avenue, Oledan Square, Makati City 1226. It is further represented that on January 1, 2005, Wacoal-Phil and Wacoal-Japan entered into a License Agreement ("Agreement") whereby under the subject Agreement, Wacoal-Japan grants to Wacoal-Phil the exclusive license to use in the Philippines Wacoal-Japan 's Know-how and Trademarks 1 to enable Wacoal-Phil to use said technical expertise and information for the purpose of sale of the Product; 2 that in consideration thereof, Wacoal-Phil shall pay to Wacoal-Japan a royalty of three percent (3%) of the annual aggregate Net Sales of the Products; that Wacoal-Phil shall pay such royalty amount to Wacoal-Japan within ninety (90) days after the end of each Wacoal-Phil 's financial year which starts on the first day of April and ends on the last day of March; that the subject Agreement shall continue for a period of three (3) years, and shall thereafter be renewed for successive one (1) year terms unless a party gives notice not to renew at least sixty (60) days prior to the end of then effective term; and that, based on Certificate of Outward Remittance issued by the Bank of the Philippine Islands dated October 7, 2013, Wacoal-Phil made a royalty payment to Wacoal-Japan on July 26, 2013. HITAEC In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to royalties derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations . (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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 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." HCTDIS Thus, Article 12 of the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides: "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. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 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. . . ." DaScHC Based on the aforequoted provisions, the Philippines may tax the royalties paid by a resident thereof to a company which is a resident of Japan at a rate not exceeding 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 and television broadcasting; and 10 percent of the gross amount of royalties in all other cases. In view thereof and considering that the royalties paid by Wacoal-Phil to Wacoal-Japan are not in respect of the use of or the right to use cinematograph films and films or tapes for radio and television broadcasting, such royalty fees are subject to the 10 percent final withholding tax rate pursuant to Article 12 (2) (b) of Philippines-Japan tax treaty, as amended. Moreover, as provided in Section 108 of the Tax Code of 1997, the said royalties are subject to value-added tax (VAT): "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%) 3 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (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." HDTSCc As to the procedure for the withholding and the payment of VAT, Wacoal-Phil , being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such royalties before making any payment to Wacoal-Japan . In remitting the VAT withheld, Wacoal-Phil shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from Wacoal-Phil if it is a VAT-registered taxpayer. In case Wacoal-Phil is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, Wacoal-Phil is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Wacoal-Japan and the fourth copy for Wacoal-Japan as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002] This ruling is issued on the basis of the foregoing 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. "Trademarks" means the following trademarks, which are registered by Wacoal-Japan in the Philippines. 2. "Product" means ladies' undergarments, apparels, sportswear and other products similar thereto: manufactured and affixed with the Trademark by an affiliate or third party authorized in advance by Wacoal-Japan and which are purchased by Wacoal-Phil and sold within the Philippines. 3. The VAT rate was increased to 12% 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.