ITAD BIR Ruling No. 068-13

March 13, 2013 ITAD BIR RULING NO. 068-13 Article 12, Philippines-Japan tax treaty PHCP Properties Holdings, Inc. First Cavite Industrial Estate Barangay Langkaan Dasmarias, Cavite Attention: Ms. Marie Pia D. Dayao Accounting Staff Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on April 13, 2011 requesting confirmation that royalties paid by PHCP Properties Holdings, Inc. ("PHCP Properties") to Hitachi Cable Ltd. ("Hitachi Cable") 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") . 1 Facts Hitachi Cable is a foreign corporation and a resident of Japan based on its amended Articles of Incorporation and Certificate of Residence issued by the Kanda Tax Office in Japan on June 17, 2011. Hitachi Cable is located at 14-1 Sotokanda 4-chome, Chiyoda-ku, Tokyo, Japan. Hitachi Cable 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 March 30, 2011. On the other hand, PHCP Properties is a domestic corporation located at First Cavite Industrial Estate, Barangay Langkaan, Dasmarias, Cavite, Philippines. On March 18, 2011, PHCP Properties and Hitachi Cable entered into an Agreement Regarding Hitachi Brand Value where Hitachi Cable granted PHCP Properties a non-exclusive right to use the Hitachi Brand which comprises of the Hitachi house mark and Hitachi logo in English and Japanese forms. PHCP Properties will use the Hitachi Brand in accordance with the Hitachi Graphic Identifications Standards in relation to its shape, size, typeface, and indication method. In consideration, PHCP Properties will pay royalties to Hitachi Cable equivalent to the royalty rate multiplied by its deemed consolidated sales of all manufactured products to which the Hitachi Brand is used. The royalty rate is 0.55 percent in 2011, 0.70 percent in 2012, 0.85 percent in 2013, and 1.00 percent in 2014. The royalties are computed and payable semiannually after the receipt of invoice by PHCP Properties from Hitachi Cable. The royalties will be remitted through telegraphic transfer to Hitachi Cable 's designated bank account. The Agreement took effect on April 1, 2011 2 for an initial term of five years. Ruling In reply, please be informed that since the relevant TTRA was filed on April 13, 2011 , and the first payment of royalties subject of the TTRA will be made later , that is, after the end of the first semiannual period on June 30, 2011 (as provided in the Agreement), such royalties paid after the first semiannual period and subsequent periods shall be subject to relief (exemption from income tax or reduction of tax) pursuant to Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") , to wit: DAHaTc "SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. " (Emphasis ours) Relative thereto, Article 12 of the Philippines-Japan tax treaty provides relief 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." 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 Article 12, 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. Accordingly, since the royalties paid by PHCP Properties to Hitachi Cable under the Agreement for the use of the Hitachi Brand are royalties for the use of trademark , and not for cinematograph films and films or tapes for radio or television broadcasting, such royalties shall be subject to income tax at the rate of 10 percent , pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty. IaSAHC Furthermore, under Section 108 (A) of the National Internal Revenue Code of 1997, as amended, the said royalties for the use of trademark in the Philippines are subject to value-added tax ("VAT"), to wit: "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%) . . ." 3 Relative thereto, PHCP Properties shall withhold VAT on the royalties at the rate of 12 percent before remitting them to Hitachi Cable. PHCP Properties 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 its accompanying proof of payment shall serve as documentary substantiation for PHCP Properties' claim of input tax on the royalties; otherwise, if it is not a VAT-registered taxpayer, PHCP Properties may treat the VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding was made. 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. Since the subject TTRA was filed on April 13, 2011 , and the first payment of royalties will be made after June 30, 2011 (the first semiannual period) of the Agreement, such royalties paid later shall be subject to relief (exemption from income tax or reduction of tax) pursuant to Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") , to wit: "SECTION 14. WHEN AND WHERE TO FILE THE TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event." 3. The VAT rate was increased to 12 percent 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. 4. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) , which provides: "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense', whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made."