ITAD BIR Ruling No. 065-10

November 30, 2010 ITAD BIR RULING NO. 065-10 Article 12, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 48-10; BIR Ruling No. ITAD 11-10 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Maria Fides A. Balili Principal, Tax Services Gentlemen : This refers to your application for tax treaty relief dated September 9, 2010 requesting confirmation that royalties to be paid from November 30, 2010, by Sharp Philippines Corporation ("Sharp Philippines") to Sharp Corporation ("Sharp") are subject to 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") . Basic Facts It is represented that Sharp is a foreign corporation organized and existing under the laws of Japan and is a resident of Japan based on its Articles of Incorporation, as amended, and on its Certification of Resident issued by the Abeno Tax Office in Japan on August 11, 2010; that Sharp is situated at 22-22 Nagaike-cho, Abeno-ku, Osaka 545-8522, Japan; that Sharp ("Shahpu Kabushikikaisha" in Japan) was established on May 1, 1935, and that it is not registered as a corporation or as partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on September 21, 2010; and that, on the other hand, Sharp Philippines is a domestic corporation situated at Kilometer 23, West Service Road, South Super Highway, Alabang, Muntinlupa, Philippines. It is also represented that Sharp Philippines and Sharp entered into a Trademark License Agreement where Sharp granted Sharp Philippines an indivisible, non-transferable and non-exclusive right and license to assemble, manufacture, and sell the Products in the Philippines; that Products means single tub washing machines (washer only or dryer only) and which carry the trademark "SHARP" (the "Trademark" ); that in consideration of the right and license granted, Sharp Philippines shall pay Sharp a royalty of one percent (1%) based on the Net Selling Price of the Products sold by Sharp Philippines during the term 1 of the Agreement; that Net Selling Price means the gross selling price of the Products sold by Sharp Philippines to any distributors or dealers in arm's length transactions less only trade discounts, accepted returns from Sharp Philippines' customers, excise or other sales taxes directly imposed upon such transactions, and transportation charges on the Products; that the royalty shall be computed for six months terminating on the last day of February and on the last day of August of each year; that Sharp Philippines shall send its royalty statement due for the immediately preceding six-month period, together with full evidence which Sharp may require, to reach Sharp not later than the last day of March and the last day of September of each year; that Sharp Philippines shall make payment to Sharp not later than thirty days after the receipt by Sharp Philippines of Sharp's electronic mail, facsimile, cable or airmail acceptance of Sharp Philippines' royalty statement or within sixty days after the expiration of the immediately preceding six month period, whichever is earlier, provided always that payments made to Sharp before it accepts such royalty statement shall be on account only; and that all royalty payments shall be made in United States dollars or in another currency to be agreed upon by the parties, and by means of official telegraphic transfer remittance or mail transfer remittance. IcADSE It is finally represented that the royalties subject of the application for tax treaty relief are not subject of 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 Senior Vice President for Finance and Administration of Sharp Philippines on September 16, 2010. Ruling A. On income tax In reply, please be informed that a foreign corporation like Sharp , whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ( "Tax Code of 1997" ), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what you invoke for this purpose is the Philippines-Japan tax treaty. Paragraphs 1, 2, 3 and 4, Article 12 thereof provide as follows: "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. xxx xxx xxx" Under paragraphs 2 and 3, Article 12 of the Philippines-Japan tax treaty, royalties arising in the Philippines and paid to a resident of Japan may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed (a) 15 percent of the gross amount of the royalties if the royalties are paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting; (b) 10 percent of the gross amount of the royalties if the royalties are 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; and (c) 10 percent of the gross amount of the royalties in all other cases [specifically, royalties in respect of the use or the right to use of any copyright of literary, artistic or scientific work (except cinematograph films and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, information concerning industrial, commercial or scientific experience, and payments for the lease of industrial, commercial or scientific equipment]. 2 CIAHaT Accordingly, royalties to be paid by Sharp Philippines to Sharp from November 30, 2010, up to August 31, 2012, pursuant to the Trademark License Agreement submitted, being essentially royalties for the use or the right to use of trademark, are subject to income tax at the preferential rate of 10 percent of the gross amount thereof. (BIR Ruling No. ITAD 48-10 dated October 6, 2010; BIR Ruling No. ITAD 11-10 dated June 16, 2010) B. On value-added tax Aside from income tax, such royalties, being payment for the lease of property in the Philippines, are subject to value-added tax (VAT), under Section 108 (A) of the Tax Code of 1997, as amended, 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, raise the rate of value-added tax to twelve percent (12%) . . ." 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. The Agreement shall be deemed to come into force on September 1, 2007, and shall continue in force and effect for five years until August 31, 2012. The Agreement shall be, either automatically or with amendment or modification (if any), renewed for another period of one year and thereafter on the same basis unless the Agreement is earlier terminated. 2. 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.