ITAD BIR Ruling No. 091-12

February 16, 2012 ITAD BIR RULING NO. 091-12 Article 12 (2) (b), Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 183-11 Moriroku Philippines, Inc. 115 North Science Avenue Laguna Technopark, Bian Laguna Attention: Fumiaki Sato President and General Manager Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on February 24, 2010, requesting confirmation that the royalties paid to Moriroku Technology Company Limited ("Moriroku-Japan") by Moriroku Philippines, Inc. ("Moriroku-Phil.") are subject to 10 percent preferential final withholding tax rate pursuant to Article 12 of the amended 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, as amended"). It is represented that on July 1, 1995, Moriroku-Japan and Moriroku-Phil. entered into a License and Technical Assistance Agreement ("Agreement") whereby Moriroku-Japan granted to Moriroku-Phil. an indivisible and non-transferable non-exclusive right and license, without the right to grant sublicenses, to manufacture, assemble and sell the Products 1 and to manufacture, assemble and install the Manufacturing Facilities within the Territory 2 under the Industrial Property Rights by using the Know-How 3 subject to the provisions of the Agreement; and that, Moriroku-Japan also provided Moriroku-Phil. technical assistance with regard to the manufacture, assembly and sale by Moriroku-Phil. of the Products in the Territory; that in consideration thereof, Moriroku-Phil. shall pay for each Product a royalty in the amount of two percent (2%) of the Formulated Price of each Product as specified in the Agreement; that successive amendments were made to the Agreement as follows: 1) August 1, 1997 amending the definition of 'Territory' on Article 1 (4) and the 'Effect of Termination' on Article 20; 2) May 31, 2005 extending the term of the Agreement from July 1, 2005 until June 30, 2010; and 3) April 1, 2009 amending the Article 13 (13.1) increasing the amount of royalty from 2% of the Formulated Price of each Product to 4.5%. CDcaSA It is further represented, based on the Notarized Summary of Royalty payments issued by Moriroku-Phil. issued on September 8, 2011, that payments were made on the following dates: November 30, 1998 May 31, 2005 May 31, 1999 September 30, 2005 December 31, 1999 November 30, 2005 January 31, 2000 March 31, 2006 May 31, 2000 October 31, 2006 December 31, 2000 November 30, 2006 May 31, 2001 May 31, 2007 November 30, 2001 November 30, 2007 May 31, 2002 May 31, 2008 November 30, 2002 November 30, 2008 May 31, 2003 May 31, 2009 October 31, 2003 November 30, 2009, May 31, 2004 May 31, 2010 November 30, 2004 November 30, 2010 March 31, 2005 May 31, 2011 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. cCaATD 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. 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 was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement laid down 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, concerning royalties paid to Moriroku-Japan beginning November 30, 1998 up to November 30, 2009 , since such payments were made before the TTRA was filed on February 24, 2010, this Office hereby DENIES relief on such royalties since the TTRA was filed beyond the 15-day period prescribed by the RMO. Accordingly, said shall be subject to income tax at the rate provided under Sections 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. . . . (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%)." However, with respect to royalties accruing on January 1, 2009 and paid by Moriroku-Phil. to Moriroku-Japan beginning May 31, 2010 , this Office hereby GRANTS relief on the royalties where they shall be subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty, as amended. AHSaTI "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 percent 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 percent of the gross amount of the royalties in all other cases." (BIR Ruling No. ITAD 183-11 dated June 27, 2011) On the other hand, with respect to value-added tax ("VAT"), under Section 108 (A) of the Tax Code, the royalties paid by Moriroku-Phil. to Moriroku-Japan under the License and Technical Agreement, are subject to VAT as follows: cDCSTA "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, 4 raise the rate of value-added tax to twelve percent (12%). . ." However, since Moriroku-Phil. is registered with PEZA and governed by the provisions of Republic Act No. 7916 , 5 as amended, the Supreme Court ruled in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. HCETDS Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly." Accordingly, as an exempt entity, Moriroku-Phil. is not subject to VAT directly on its sale of goods and supply of services to its customers, and indirectly on its purchase of goods and services when such purchase is subject to VAT. With respect to the royalties at hand, since Moriroku-Japan is a foreign corporation and not a registered VAT taxpayer, such royalties paid by Moriroku-Phil. to Moriroku-Japan are exempt from VAT instead of being subject to VAT at zero percent. 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. Products shall mean certain plastic parts for automobiles, motorcycles, power products and industrial products including parts repair or replacement, as well as certain molds necessary to produce the parts hereof. 2. Territory shall mean the Republic of the Philippines, Thailand, Malaysia, Taiwan, Indonesia, Singapore and such other countries as may be decided hereafter upon agreement in writing by the parties hereto. 3. Know-How shall mean any and all technical information Know-How, data and knowledge relating to the products (except for the Industrial Property Rights as defined below), including but not limited to designs, drawings, standards, specifications, which Moriroku-Japan from time to time owns or is entitled to grant license to Moriroku-Phil., relating to (i) the manufacture, assembly and sale of the Products, (ii) the construction and operation of the plant for the manufacture, assembly, installation and operation of the Manufacturing Facilities (as defined below); and all materials and documents, whether original or reproduced copies thereof, containing any such information, know-how, data or knowledge. 4. The VAT rate was increased to 12 percent beginning 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. 5. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for This Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes. Section 11 thereof provides: "CHAPTER II GOVERNING STRUCTURES SECTION 11. The Philippine Economic Zone Authority (PEZA) Board. There is hereby created a body corporate to be known as the Philippine Economic Zone Authority (PEZA) attached to the Department of Trade and Industry. . . The existing Export Processing Zone Authority (EPZA) created under Presidential Decree No. 66 shall evolve into the PEZA in accordance with the guidelines and regulations set forth in an executive order issued for this purpose."