ITAD BIR Ruling No. 095-11

March 15, 2011 ITAD BIR RULING NO. 095-11 Article 12, Philippines-Switzerland tax treaty; BIR Ruling No. ITAD 40-07; BIR Ruling No. ITAD 42-10; BIR Ruling No. ITAD 17-10 Holcim Philippines, Inc. 7th Floor, Two World Square Mckinley Hill, Fort Bonifacio Taguig City Attention: Ms. Hazel Quennie Saez Tax Officer Gentlemen/Ladies : This refers to your application for relief from double taxation dated May 4, 2009, filed on behalf of Holcim IP Ltd. ("Holcim") , requesting confirmation that royalties paid by Holcim Philippines, Inc. ("Holcim Philippines") to Holcim are subject to the preferential tax rate of 15 percent pursuant to Article 12 of 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). Facts It is represented that Holcim is a foreign corporation organized and existing under the laws of Switzerland, with office address at Zurcherstrasse 156 CH-8645, Jona, Switzerland; that Holcim is a resident of Switzerland for the purpose of the Philippines-Switzerland tax treaty, as evidenced by the Certificate of Fiscal Residence issued by the Tax Administration of the Canton of St. Gallen in Switzerland on February 27, 2009; that Holcim is not registered as a corporation or as a partnership in the Philippines, based on the Certification of Non-Registration issued by the Securities and Exchange Commission on March 26, 2009; and that on the other hand, Holcim Philippines is a corporation organized and existing under the laws of the Philippines, with business address at the 7th Floor, World Square, Mckinley Hill, Fort Bonifacio, Taguig Level 3, PHINMA Plaza, Rockwell Center, Makati City. It is further represented that on February 16, 2009, Holcim and Holcim Philippines entered into a Trademark License Agreement where Holcim granted a partial and exclusive 1 right to use and apply the Trademark without any territorial limitations in association with the goods and services (Goods and Services) ; that Trademark means the following registered and unregistered trademarks: THAICD 1. Holcim 2. HC-Logo (Device) 3. Holcim and HC-Logo Excel Premium Portland with Holcim Device 4. Holcim and HC-Logo Excel with Holcim Device Holcim 5. Holcim and HC-Logo Premium Portland Cement with Holcim Device 6. Holcim and HC-Logo Premium Pozzolan Cement with Holcim Device 7. Holcim and HC-Logo Premium with Holcim Device 8. Holcim and HC-Logo Premium with Holcim Device 9. Holcim and HC-Logo Wallright with Holcim Device 10. Because tomorrow matters (Slogan) 11. HELPSUBUILD 12. Holcim Helps you build (Slogan) 13. GEOCYCLE That Goods and Services include, but are not limited to, stationery and forms, signs, vehicles, packaging systems, uniforms, Web and information technology, publications, promotional material, presentations, and advertising; that in consideration, Holcim Philippines shall pay remuneration to Holcim in accordance with the following rules: RULE 1 : On the date on which the Trademark was launched or will be launched ("Launching Date") regardless of the period during which takes place Holcim Philippines shall have a grace period ("Grace Period") , which starts on the first day of the month following the Launching Date, during which Holcim Philippines may use the Trademark free of charge. The Grace Period shall in principle have a duration of six months, whereby the parties may agree by mutual consent expressed in writing for a longer duration of the Grace Period. The Grace Period shall provide Holcim the time necessary to introduce the Trademark in the Philippines for the first time, but shall not apply to any subsequent trademark introductions. RULE 2 : The value of the Trademark will increase during the initial period, as the Trademark becomes increasingly known in the marketplace. To take into account this increase, the license fee to be calculated on Holcim Philippines' net sales to third parties are as follows: Period Licensee Fee January 1, 2009, and onwards 0.70% RULE 3 : The license fee shall be calculated, due and payable annually according to the terms and conditions of the Agreement: Calculation: It is Holcim Philippines' obligation to make the necessary calculations of the annual licensee fee due on December 31 of each calendar year. The calculation shall be denominated in Philippines pesos, and Holcim Philippines shall forward the calculation to Holcim before paying the licensee fee. IaHDcT Auditors' Certificate: Upon Holcim's request, Holcim Philippines shall cause its statutory auditors to issue a certificate confirming that the figures of the calculation are in line with the terms and conditions of the Agreement. Payment: The payment of the annual licensee fee shall be made not later than February 15 of the following year. The payment will be made at Holcim Philippines' discretion in Swiss Francs, Euros, or US Dollars. It is further represented that the Agreement took effect on January 1, 2009, and will be in effect indefinitely, unless terminated earlier. It is finally represented that the issue or transaction subject of the 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 based on the Certificate issued by the Corporate Secretary of Holcim Philippines dated April 29, 2009. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code'') of 1997, as amended, such payments made to Holcim, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent based on the gross amount thereof, to wit: "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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%) . . . " However, under Section 32 (B) (5) of the Tax Code of 1997, as amended, the payments may be exempt from income tax or partially exempt (if subject to a reduced rate only) to the extent required by any obligation on the Philippines, to wit: IcESaA "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." In relation thereto, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1, 2, 3 and 4, Article 12 thereof provide: "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 the State, but the tax so charged shall not exceed 15 per cent 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." Based on the aforequoted provisions, royalties arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed 15 percent of the gross amount of the royalties. 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 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. This being the case, this Office is of the opinion and so holds that the remuneration to be paid by Holcim Philippines to Holcim under the Agreement for the use of the Trademark in the Philippines on the Goods and Services, being essentially royalties with respect to the use of, or the right to use, of a trademark, is subject to income tax in the Philippines at the reduced rate of 15 percent of the gross amount thereof. (BIR Ruling No. ITAD 42-10 dated September 23, 2010; BIR Ruling No. ITAD 17-10 dated August 11, 2010; BIR Ruling No. ITAD 40-07 dated March 19, 2007) Finally, the remuneration to be paid by Holcim Philippines to Holcim under the Agreement, being payments for the use or lease of (intangible) properties in the Philippines, is subject to value-added tax (VAT). Section 108 (A) of the Tax Code of 1997, as amended, provides: EAHcCT "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, 2 raise the rate of value-added tax to twelve percent (12%) . . . The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . . 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 Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax." Accordingly, Holcim Philippines, being the resident withholding agent, shall withhold VAT on the amounts payable to Holcim, being the nonresident lessor or licensor of intangible properties, at the rate of 12 percent. Section 4.112-2 of Revenue Regulations No. 16-2005, 3 as amended by Revenue Regulations No. 4-2007, 4 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 CTIDcA (2) 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 'expense' or 'asset', 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." This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. AIaDcH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Partial and Exclusive means that within the Philippines Holcim shall: Be entitled to exercise the right to use and apply the Trademark in the Philippines; Be entitled to grant the right to use and apply the Trademark in the Philippines to any company which is part of the Holcim Group of Companies; and Not be entitled to grant the right to use and apply the Trademark in the Philippines to any third party or not part of the Holcim Group of Companies in good understanding that all persons and entities which are not a company of the Group are third parties. 2. 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. 3. Entitled Consolidated Value-Added Tax Regulations of 2005 . 4. Entitled Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005 .