ITAD BIR Ruling No. 083-12

February 16, 2012 ITAD BIR RULING NO. 083-12 Article 12, Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-042-10 Riego de Dios Law Offices 28th Floor, Tower 2, The Enterprise Center 6766 Ayala Avenue corner Paseo de Roxas 1226 Makati City Attention: Maria Rachel V. Riego de Dios Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 8, 2011, on behalf of Franke Technology and Trademark Ltd. ("FTTL"), requesting confirmation that the royalty payments to FTTL by Franke Foodservice Systems Philippines, Inc. ("FFSPI") are subject to 15 percent preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). It is represented that FTTL (formerly, Niro Plan AG ), with address at Sonnenbergstrasse 9, CH-6052 Hergiswil, Switzerland, is a corporation organized and existing under the laws of Switzerland and is a resident of Switzerland per Certificate of Fiscal Residence issued by the Kantonales Steueramt on July 28, 2011; that FTTL is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated August 5, 2011; and that, on the other hand, FFSPI is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at B1 6 & 7 Phase 1, Carmelray Industrial Park II, Brgy. Tulo, Calamba City, Laguna; and that FFSPI is also registered with the Philippine Economic Zone Authority ("PEZA") as an Ecozone Export Enterprise, particularly, to engage in the fabrication and consolidation of complete kitchen package based on the Registration Agreement dated October 16, 2000. cDAITS It is further represented that FTTL and FFSPI entered into a License Agreement ("Agreement") ; that the Agreement commenced on January 1, 2001 and shall continue for the entire term of FFSPI and shall be terminated upon dissolution of FFSPI in accordance with the terms of its Articles of Association; that under the Agreement, FTTL grants to FFSPI a non-exclusive right to use the manufacturing Know-How 1 and the Technical Information 2 relating to the production of the Products 3 in the Philippines and sale of the Products in the Philippines; the non-exclusive right to use in the Philippines the Trademark for the sale, distribution and marketing of the Products manufactured in the Philippines by FFSPI; and the non-exclusive right to use abroad the Trademark for the sale, distribution and marketing of the Products manufactured in the Philippines by FFSPI to only other companies within the Franke Group; and that in consideration of the license granted by FTTL, FFSPI agrees to pay to FTTL a royalty of 3% of the total net sales of the Products per annum. It is finally represented, based on the Sworn Statement by FFSPI on August 16, 2011, that the transaction subject of the request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal of the taxpayer/s involved. In reply, please be informed that royalty payments to a nonresident foreign corporation are, in general, covered by Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended. 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: IHEAcC "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. xxx xxx xxx In accordance with the foregoing, Article 13 of the Philippines-Switzerland tax treaty may apply to the subject payments. It 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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15 percent of the gross amount of the royalties. 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 and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the aforequoted provisions the tax imposed on royalties derived by a resident of Switzerland like FTTL from sources within the Philippines may be taxed in the Philippines at a rate not exceeding 15 percent of the gross amount of the royalties. HcaDTE However, since the Agreement that gives rise to the royalties is effective from January 2001 up to the entire term of FFSPI, and the subject TTRA was filed only on September 8, 2011, this Office hereby DENIES relief on those royalties paid by FFSPI to FTTL before September 8, 2011. 4 Said royalties shall be subject to income tax at 30 percent, and, 35 percent for the royalty payments prior to January 1, 2009 , as provided under Section 28 (B) (1) of the Tax Code of 1997. With respect to royalties paid by FFSPI to FTTL beginning September 8, 2011, this Office hereby holds that said royalties shall be subject to income tax at the reduced rate of 15 percent of the gross amount thereof, pursuant to Article 12 (2) of the Philippines-Switzerland tax treaty. 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. "Manufacturing Know-how" shall mean all formulae, processes, written data, designs, diagrams, instructions and similar information and similar information which relate to and are necessary for the manufacturing of the FFSPI manufactured "Products". 2. "Technical Information" shall mean any ancillary information belonging to Niro-plan relating to the Products, Manufacturing Know-how and the Trademark required and/or convenient for the manufacturing of the Products. 3. "Products" shall mean any one or more the following products: Fast food kitchen equipment for quick service restaurants. 4. Pursuant to Section 14 of Revenue Memorandum Order No. 72-2011 (Guidelines on the Processing of the Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties).