ITAD BIR Ruling No. 097-12

April 16, 2012 ITAD BIR RULING NO. 097-12 Article 12, Philippines-Netherlands tax treaty Law Office of A.M. Sison, Jr. & Partners Suite 2002-A Security Bank Centre 6776 Ayala Avenue, 1226 Makati City Philippines Attention: Atty. Antonio L. Cardio Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 18, 2010 requesting confirmation that the royalties paid by Tupperware Brands Philippines, Inc. ("Tupperware") to Sara Lee Household and Body Care Nederland B.V. ("Sara Lee") are subject to 15 percent preferential tax rate pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that Sara Lee , a corporation duly organized and existing under the laws of the Netherlands, with address at Vieutensevaart 35, 3532 AD Utrecht, is a resident of the Netherlands within the meaning of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands dated March 22, 2010; that it is not registered as a corporation or partnership in the Philippines per the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 7, 2010; and that Tupperware , on the other hand, is a corporation duly organized and existing under the laws of the Philippines, with address at 2288 Chino Roces Avenue Extension, Makati City 1231. It is further represented that a Trademark License Agreement ("TLA") dated December 18, 2008 was entered into by and between Sara Lee , as the 'Licensor', and Fuller Life Direct Selling Philippines, Inc. (now 'Tupperware Brands Philippines, Inc.', hereinafter referred to as 'Tupperware', per the Certificate of Filing of Amended Articles of Incorporation effective January 22, 2010), as the 'Licensee', whereby Sara Lee granted to Tupperware an exclusive license in the Territory 1 during the Term of the TLA: (1) to use the Licensed Marks 2 on Products 3 and Materials 4 in the conduct of the Direct Selling Business only; and (2) to manufacture or have manufactured, label, market, distribute and sell such Products bearing the Licensed Marks; that Tupperware shall pay to Sara Lee a royalty for the trademark license and for the other rights granted under the TLA in an amount equal to the greater of: (a) six percent (6%) of Net Sales of Products, and (b) the Minimum Annual Royalty calculated as follows: (i) for the period from the Effective Date 5 until June 30, 2010, the Minimum Annual Royalty shall be US$400,000, (ii) for the period from July 1, 2010 until June 30, 2011, the Minimum Annual Royalty will be US$400,000 times a multiplier equal to the Head Inflation Rate published by the National Economic and Development Authority of the Philippines for the calendar year ending on the December 31 immediately prior to the date of calculation, provided that the multiplier shall in no event be less than 10 percent nor more than 15 percent, regardless of the actual Headline Inflation Rate, and (iii) during any subsequent 12-month period during the term of the TLA, the multiplier described in subparagraph (ii) above shall be applied to the Minimum Annual Royalty in effect during the previous 12-month period; that the TLA shall commence on the Effective Date and shall expire, unless earlier terminated under the TLA, three (3) years thereafter; and that, unless earlier terminated by either party by giving 12 months' previous notice thereof, the TLA shall automatically be extended for an additional 3-year period and thereafter automatically be extended for another additional 3-year period. IEcaHS It is finally represented that 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 per the sworn statement of the Chief Finance Officer of Tupperware dated October 15, 2010. In reply, please be informed that royalty income derived by a nonresident foreign corporation is generally subject to tax as provided for under Section 28, (B) [1] of the National Internal Revenue Code of 1997 ("Tax Code of 1997") , as amended. It provides, viz.: "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 . . . 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 same Tax Code provides as follows, to wit: "SEC. 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: 6 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 relation thereto, Article 12 the Philippines-Netherlands tax treaty which you invoked, may apply to the instant case. It provides, viz.: "Article 12 ROYALTIES 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. 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 cinematograph films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the foregoing, royalties paid by Tupperware to Sara Lee may be taxed in Netherlands, the country where Sara Lee , the beneficial owner of the royalties, is a resident. Paragraph 2 of the same Article provides that the subject royalties may likewise be taxed in the Philippines, where they arise, but the tax so charged shall not exceed: (a) 10 percent of the gross amount of the royalties if they are paid by an enterprise registered and engaged in preferred areas of activities in the Philippines; and (b) 15 percent of the gross amount of the royalties in all other cases. 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. 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) AcTHCE 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. EB Case No. 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 68844 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 there were royalties received by Sara Lee on July 31, 2009 and January 31, 2010 , and the subject TTRA was only filed on October 18, 2010 in violation of Section III (2) of RMO 1-2000, this Office hereby DENIES relief on all royalties paid before the filing of the TTRA on October 18, 2010 for having been filed beyond the 15-day period prescribed by the RMO. Accordingly, the subject royalties shall be subject to income tax at the rate provided for under Section 28 (B) (1) of the Tax Code of 1997, as amended. However, relief is hereby GRANTED on royalties paid by Tupperware to Sara Lee after 15 days from the filing of the TTRA on October 18, 2010 , and the same shall be subject to income tax at a reduced rate of 15 percent of the gross amount thereof, pursuant to Article 12 (2) (b) of the Philippines-Netherlands tax treaty. Moreover, the above royalty payments shall be subject to value-added tax ("VAT") as provided for in Section 108 of the Tax Code of 1997, as amended, viz. : "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%) 7 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . . . 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; . . ." With regard to the procedures for the withholding and the payment of the VAT, Tupperware , being the resident withholding agent and payor in control of payment, shall be responsible for the withholding of the final VAT on such royalties before making any payment to Sara Lee. In remitting the VAT withheld, Tupperware shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from Tupperware if it is a VAT-registered taxpayer. In case Tupperware is not VAT-registered, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, Tupperware is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Sara Lee and the fourth copy for Tupperware as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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. cECaHA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 'Territory' shall mean the 'Philippines'. 2. 'Licensed Marks' shall mean the trademarks identified in Schedule A of the TLA means 'Petit Cheri' and 'Zwitzal' (Baby). 3. 'Products' shall mean products produced, marketed, distributed or sold by the Direct Selling Business that contain a Licensed Mark as of the Effective Date and Line Extensions. 4. 'Materials' shall mean all materials such as packaging, advertising materials, publicity and public relations, signage, websites and all other materials, stationery, business cards, business forms and similar organizational items that are produced by or on behalf of Tupperware, that bear the Licensed Marks as authorized herein by Sara Lee, and that are used to operate, market, promote and advertise the Direct Selling Business, but excluding Merchandising Materials. 5. 'Effective Date' shall mean the expiration of the normal term of the Original License Agreement, June 30, 2009. 6. TITLE II TAX ON INCOME. 7. The VAT rate was increased to 12% on 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.