ITAD BIR Ruling No. 065-14

June 9, 2014 ITAD BIR RULING NO. 065-14 Article 12, Philippines-Singapore tax treaty; Sections 28 (B) (1), 32 (B) (5) and 108 (A) of the NIRC;BIR Ruling No. ITAD-158-04 Contemporain Foods, Inc. 2225 Tolentino Street Pasay City Attention: Oszen A. Chan President Gentlemen : This refers to your application for tax treaty relief filed on January 17, 2012, requesting confirmation that the royalty fees paid by Contemporain Foods, Inc. ("CFI") to Seven Peacock Pte. Ltd. ("SPPL-SG") are subject to preferential rate of 25 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . It is represented that SPPL-SG is foreign corporation organized and existing under the laws of Singapore with registered office at 6 Temasek Boulevard #09-05 Singapore, based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division on March 16, 2012; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification of Non-registration of Company issued by the Securities and Exchange Commission dated August 3, 2011; that on the other hand, CFI is a domestic company with principal business address at 2225 Tolentino Street, Pasay City. It is further represented that on May 27, 2011, SPPL-SG and CFI entered into a J.Co Area Development Agreement ("Agreement") whereby SPPL-SG grants to CFI, a personal, non-transferable and exclusive set of rights to be exercised within the Philippines, the following rights: SATDEI a) to operate the business of developing, opening and operating retail outlets serving high quality donuts, drinks, beverages and related services ("Business") at the J.Co Stores in accordance with the J.Co System; and b) to use solely in conjunction with the operation of the Business at the J.Co stores in the Philippines, the J.Co System, the Trade Name, the Trade Marks and such other related or ancillary trademarks, trade names, emblems, designs, labels, signs and symbols belonging to or otherwise used by J.Co and appearing in connection with the Business or on the Products J.Co may from time to time stipulate that for and in consideration of the grant of license, CFI shall pay SPPL-SG: Fees Amount Date Payable Joining fee USD480,000.00 upon execution of the Agreement Store fee USD32,000.00 for each upon J.Co's issuance of Store location Certificate Design fee USD8,800.00 for each J.Co within 10 days from the date of the store invoice Recurring fee 8% of the aggregate gross within ten days following the end of revenue generated at all J.Co each month during which the gross stores in each month revenue accrued throughout the term of the Agreement Initial Training fee waived waived Continuing Training as stipulated in the J.Co and fee Operations Manual Translation fee to be determined upon written notification by J.Co Quality Assurance Fee as advised by J.Co Per Diem a) J.Co's Senior Management Directors: USD500 per day or any part thereof b) J.Co's Managers: USD300 per day or any part thereof c) J.Co's Staff Below manager level: USD100 per day or any part thereof It is finally represented that the royalties subject of the above request for ruling are not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings or judicial appeal per Certification issued by the President of CFI on October 28, 2011. THaCAI A. On income tax 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 royalty fees received by non-resident foreign corporations such as SPPL-SG. It provides: "Section 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 . . ., royalties, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" 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. STcADa xxx xxx xxx" With respect to a treaty, what is invoked for this purpose is the Philippines-Singapore tax treaty, Article 12 thereof provides: "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, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but if the recipient is the beneficial owner of the royalties, the tax so charge shall not exceed: (a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; (c) in all other cases, 25 per cent of the gross amount of royalties. IHaSED 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 tapes for television or 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" Based on the aforementioned provisions, in the case of Philippines, royalties shall be taxed at a preferential rate not exceeding of 15% if the payor is a Board of Investments (BOI) registered enterprise and engaged in preferred areas of activities and royalties are paid in respect of cinematographic films or tapes for television or broadcasting. In all other cases, royalty payments will be taxed at a rate not exceeding 25% of the gross amount of royalties. Considering that CFI is not a BOI registered enterprise which is engaged in preferred areas of activities in the Philippines and that the herein royalty payments are not in respect of cinematographic films or tapes for television or broadcasting, this Office is of the opinion and so holds that the royalty payments by CFI to SPPL-SG are subject to the preferential tax rate of 25% of the gross amount of royalties pursuant to Article 12 (2) (c) of the Philippine-Singapore tax treaty. B. On value-added tax Moreover, the said royalty payments are subject to 12% value-added tax pursuant to Section 108 of the Tax Code, as amended. Accordingly, CFI being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 12% VAT withheld, CFI 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 the proof of payment thereof shall serve as documentary substantiation for the claim of input tax by CFI upon filing its own VAT. In addition, CFI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of SPPL-SG, the first three copies thereof to be given to SPPL-SG and the fourth copy to be retained by CFI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3, RR 8-2002; Section 7, RR No. 14-2002]. CHaDIT This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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