ITAD BIR Ruling No. 070-14

June 10, 2014 ITAD BIR RULING NO. 070-14 Article 13 (2) (b) (iii), Philippines-United States tax treaty; Article 12, Philippines-Czech tax treaty Isla Lipana & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Malou P. Lim Partner Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on May 29, 2008, on behalf of TURNER ENTERTAINMENT NETWORK ASIA, INC. ("TENAI"), requesting confirmation that royalties paid by the following: (1) Richwell Philippines, Inc. ("Richwell") , (2) Richwell Trading Corporation ("Richwell-Trading") , (3) Filstar Distributor Corporation ("Filstar") , (4) Jollibee Foods Corporation ("Jollibee") , and (5) Paramount Vinyl Products Corp. ("Paramount") , for the use of TENAI's trademarks are subject to a preferential tax rate of 10 percent pursuant to Article 13 (2) (b) (iii) of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty") . It is represented that TENAI is a resident of the United States of America for tax treaty purposes with office address at 30/F Oxford House, Tai Koo Place, 979 King's Road, Quarry Bay, Hong Kong; that it is not registered either as a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 3, 2008; that Richwell is a corporation organized and existing under the laws of the Philippines with office address at Richwell Building, 25 Quezon Avenue, Quezon City; that Richwell-Trading is a corporation organized and existing under the laws of the Philippines with office address at Richwell Building, 25 Quezon Avenue, Quezon City; that Filstar is a corporation organized and existing under the laws of the Philippines with office address at 2/F Reliance Center Building, #99 E. Rodriguez Jr. Avenue, Ugong, Pasig City; that Jollibee is a corporation organized and existing under the laws of the Philippines with office address at 10/F Jollibee Plaza Emerald Avenue, Ortigas Center, Pasig City 1605; that Paramount is a corporation organized and existing under the laws of the Philippines with office address at 56 G. de Jesus Street, Kalookan City, Metro Manila 1400. ETHCDS It is further represented that TENAI entered into a Non-Exclusive International Product License Agreements ("Agreements") with the abovementioned domestic corporations under the following terms and conditions: Terms Start End date Guaranteed Date Consideration Richwell Philippines, Inc. 2 yrs. 1-Nov-05 31-Dec-07 US$8,000.00 Richwell Trading Corporation 2 yrs. & 2 mos. 1-Nov-05 31-Dec-07 US$8,000.00 Filstar Distributor Corporation 1 yr. & 3 mos. 1-Oct-06 31-Dec-07 USD5,000.00 Jollibee Foods Corporation 1 yr. 1-Sep-06 31-Aug-07 USD10,000.00 1 yr. 1-Nov-06 31-Oct-07 USD10,000.00 1 yr. 1-Feb-07 31-Jan-08 USD10,000.00 Paramount Vinyl Products Corp. 2 yrs. & 4 mos. 15-Jun-07 14-Oct-09 USD15,000.00 2 yrs. & 4 mos. 1-Jul-07 31-Oct-09 USD10,000.00 It is finally represented the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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 income derived in the Philippines by a nonresident foreign corporation. 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 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." EASIHa Thus, the Philippines-United States tax treaty, which you invoked may apply in the herein case. It provides: "ARTICLE 13 Royalties 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. However the tax imposed by that other Contracting State shall not exceed: (a) In the case of the United States, 15 percent of the gross amount of the royalties, and (b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. 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 films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term 'royalties' also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof." IcSEAH The "most-favored-nation" clause under Article 13 (2) (b) (iii) of the Philippines-United States tax treaty calls for the application of a Philippine Tax Treaty which provides for the lowest rate of the Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. Thus, applying the "most-favored-nation" clause, the tax rate of 10 percent may be granted based on the Philippines-Czech tax treaty. Article 12 of the said treaty 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 laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work, other than that mentioned in sub-paragraph (b), any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience; b) 15 per cent of the gross amount of the royalties arising from the use of, or the right to use, any copyright of cinematograph films, and films or tapes for television or radio broadcasting. ESAHca xxx xxx xxx" Under Article 12 (2) (a) of the Philippines-Czech tax treaty, royalties for information concerning industrial, commercial or scientific experience; royalties for the use of or right to use any copyright of literary, artistic or scientific work, and any patent, trade mark, design or model, plan, secret formula or process, or any industrial, commercial or scientific equipment, are subject to 10% income tax based on the gross amount of royalties. In view of the foregoing, royalties paid by Richwell, Richwell-Trading, Filstar, Jollibee , and Paramount to TENAI are subject to a preferential rate of 10% under Article 13 of the Philippines-United States tax treaty, in relation to Article 12 of the Philippines-Czech tax treaty. As for the mechanism employed in mitigating the effects of double taxation, Article 23 of the Philippines-United States tax treaty reads: "Article 23 Relief from Double Taxation Double taxation of income shall be avoided in the following manner: 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. . . . ." CSIcTa Likewise, Article 22 of the Philippines-Czech tax treaty provides, viz. : "Article 22 Elimination of Double Taxation xxx xxx xxx 2. In the case of a resident of the Czech Republic, double taxation shall be eliminated as follows: a) The Czech Republic, when imposing taxes on its residents, may include in the tax base upon which such taxes are imposed the items of income which according to the provisions of this Convention may also be taxed in the Philippines, but shall allow as a deduction from the amount of tax computed on such a base an amount equal to the tax paid in the Philippines. Such deduction shall not, however, exceed that part of the Czech tax, as computed before the deduction is given, which is appropriate to the income which, in accordance with the provisions of this Convention, may be taxed in the Philippines. b) Where in accordance with any provision of the Convention income derived by a resident of the Czech Republic is exempt from tax in the Czech Republic, the Czech Republic may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income." Under the ordinary credit method, the United States and Czech (as countries of residence) would limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in their countries that is attributable to the income that is taxed in the Philippines (the country of source or country of situs). As a result of this limitation, if the Philippines has an effective tax rate that exceeds the effective tax rate of the United States and Czech on a particular income, the United States and Czech would not grant the taxpayer a full credit for the income tax imposed by the Philippines on such income. TAacIE Moreover, the said royalties payments by Richwell, Richwell-Trading, Filstar, Jollibee , and Paramount to TENAI are subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code, as amended, which provides as follows: "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 the 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%), after any of the following conditions has been satisfied: LLpr xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including . . . . The phrase 'sale or exchange of services' shall likewise include: (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; xxx xxx xxx" Accordingly, the abovementioned domestics corporations namely: Richwell, Richwell-Trading, Filstar, Jollibee , and Paramount , being the resident withholding agents and payor in control of the payment, shall be responsible for the withholding of the 12 percent final VAT on such royalties before making any payment to TENAI. In remitting the VAT withheld, the foregoing domestic corporations 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 proof of payment thereof shall serve as documentary substantiation for the claim of input tax by the foregoing domestic corporations upon filing their own VAT return, if they are a VAT-registered taxpayer. In case the foregoing domestic corporations are non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of goods or properties purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, the foregoing domestic corporations are required to issue the Certificate of Final Income Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to TENAI upon its request and the fourth copy to be retained by the foregoing domestic corporations as their file copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07)] 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