ITAD BIR Ruling No. 074-12

February 16, 2012 ITAD BIR RULING NO. 074-12 Nexus Technologies, Inc. Ground Floor, Don Pablo Building 114 Amorsolo Street, Legaspi Village Makati City Attention: Maria Teresa P. Teologo Accounting Manager Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on December 5, 2005 requesting confirmation that royalties paid by Nexus Technologies, Inc. ("Nexus") to Microsoft Sales Corporation ("Microsoft") are subject to the income tax at the rate of 10 percent pursuant to 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. Facts Microsoft is a corporation organized and existing under the laws of the United States and is a resident thereof based on the Certification issued by the Internal Revenue Service of the United States on August 25, 2004. Microsoft is situated at 6100 Neil Road, Reno, Nevada, United States. Microsoft is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on October 21, 2004. On the other hand, Nexus is a domestic corporation situated at the Ground Floor, Don Pablo Building 114 Amorsolo Street, Legaspi Village, Makati City, Philippines. On July 1, 2004, Microsoft entered into a Large Account Reseller Agreement with Nexus where Microsoft appointed Nexus as a non-exclusive large account reseller in the Philippines to acquire licenses and software assurance from Microsoft for distribution to volume licensing customers in the Philippines. Nexus' signature on the volume licensing customer's enrollment shall constitute Nexus' agreement to pay Microsoft for all copies of software products and documentation components made by, and software assurance provided to, the volume licensing customer pursuant to such enrollment, in accordance with the software price list set forth on the most recent reseller price schedule published by Microsoft from time to time. Following the receipt of any purchase order from a volume licensing customer, Microsoft shall invoice Nexus and Nexus shall pay Microsoft the prices set forth on the software price list or applicable channel price sheet or reseller information form. All amounts are due within 60 days from the date of invoice issued by Microsoft. The Agreement took effect on July 1, 2004 and remained in effect initially up to June 30, 2005. The Agreement was extended up to September 30, 2005, and then up to October 31, 2005. CSTcEI Ruling Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000"), any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division (" ITAD ") of this Bureau at least 15 days before the intended transaction or payment of income, thus: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. , payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. . ." (Emphasis ours) This condition was emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: "However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. ECSHAD The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Emphasis ours) This decision is upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, this requirement in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). In view of the foregoing, since the Agreement was in effect from July 1, 2004 to October 31, 2005, but the subject TTRA was filed on December 5, 2005, this Office hereby DENIES relief on any income payments made by Nexus to Microsoft under the Agreement for having the TTRA filed beyond the fifteen-day period required in RMO 1-2000. Accordingly, said payments shall be subject to income tax at the rate of 35 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, to wit: "SEC. 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 interests, 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) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." AacCIT Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue