ITAD BIR Ruling No. 099-16

June 22, 2016 ITAD BIR RULING NO. 099-16 Article 11 (Royalties), Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty; BIR Ruling No. 286-82; BIR Ruling No. DA-ITAD 49-08; BIR Ruling No. DA-ITAD 75-08 Castillo Laman Tan Pantaleon & San Jose The Valero Tower, 122 Valero St. Salcedo Village, Makati City Attention: Atty. Alvin O. Geli Atty. Abigail D. Sese Gentlemen : This refers to your application for tax treaty relief dated April 1, 2011 requesting, in behalf of Reckitt & Colman (Overseas) Limited ("RCOL") [formerly Reckitt, Colman, Chiswick (Overseas) Limited], confirmation of your opinion that the royalty payments made by Reckitt Benkiser Healthcare Philippines, Inc. ("RBHP") to RCOL are subject to the preferential tax rate of 25 percent pursuant to Article 11 of the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-United Kingdom tax treaty") . HTcADC Basic Facts It is represented that RCOL is a corporation organized and existing under the laws of the United Kingdom and is a resident of the United Kingdom, based on its Memorandum of Association and on the Certificate of Residence issued by the HM Revenue and Customs Office on August 13, 2010; that RCOL is situated at 103-105 Bath Road, Slough, Berkshire SL1, 3UH, England; that the primary objects of RCOL are to carry on all or any of the businesses of exporters and importers of, and dealers, both wholesale and retail, in starch, starch products and other pharmaceutical preparations; that RCOL is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 12, 2010; and that, on the other hand, RBHP is a corporation organized and existing under the laws of the Philippines situated at 22nd Floor, Equitable Bank Tower, 8757 Paseo de Roxas, Makati City, Philippines. It is likewise represented that on August 4, 2003, RCOL and Reckitt Benckiser (Philippines), Inc. ("RBP") entered into a License Agreement ("Agreement") with the following stipulations: 1. RCOL granted RBP the sole right, without excluding any rights of RCOL itself or any rights granted by RCOL to any of its group companies, to use the Intellectual Property Rights 1 in connection with the design, production, distribution, marketing and sale of the Products; 2 2. The license to use the Intellectual Property Rights in connection with the design, production, distribution, marketing and sale of Products is limited in the Philippines; 3. In consideration of the rights and Intellectual Property Rights granted by RCOL under the Agreement, RBP shall pay royalties in the amount of: 3.1. 4% of the net revenue (third party) of the Products, if the relevant trademark is not owned by RBP; 3.2. 3% of the net revenue (third party) of the Products, if the relevant trademark is owned by RBP. 3.3. Net revenues (third party) shall be calculated as follows: gross invoiced price of the Products sold to third party customers ( i.e. , excluding sales to other companies in the RCOL) less taxes, all trade cash and other discounts, whether or not such discounts are shown on the invoices, returns in the normal course of business, and year-end bonuses. 4. A calculation of the amount of royalties due shall be made at the end of each calendar quarter and the amount due shall be paid by the 20th of the month following a calendar quarter; 5. The Agreement shall commence on January 1, 2003, and shall continue for an indefinite period of time, unless terminated. It is also represented that RCOL and RBP entered into an Amendment to the Agreement which amended, among others, Article 6.1 of the Agreement on royalties; that pursuant thereto, RBP shall pay RCOL royalties in the amount of: a) 6% of the net revenues (third party) of the health and personal care power-brand products, if the relevant trademark is not owned by RBP; b.) 4.5% of the net revenues (third party) of the health and personal care power-brand products, if the relevant trademark is owned by RBP; c.) 5% of the net revenues (third party) of the health and personal care non-power-brand products or non-health and personal care power brands and all Dettol products, if the relevant trademark is not owned by RBP; d.) 5% of the net revenues (third party) of the health and personal care non-power-brand products or non-health and personal care power brands and all Dettol products, if the relevant trademark is owned by RBP; e.) 3.5% of the net revenues (third party) of all other Products, if the relevant trademark is not owned by RBP; and, f.) 2.65% of the net revenues (third party) of all other Products, if the relevant trademark is owned by RBP; and that the Amendment will take effect on January 1, 2007. It is further represented that on April 2010, RCOL, RBP and RBHP entered into a Novation Agreement where RBHP replaced RBP as the original party to the Agreement, as amended, beginning January 1, 2010; and that as such, RBP will be released from its contractual obligations to RCOL and that RBHP will be bound by the terms and conditions of the Agreement, as amended. aScITE It is finally represented based on the Sworn Statement issued by the Assistant Corporate Secretary of RBHP on March 31, 2011, that the royalties subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling A. On income tax In reply, please be informed that royalties payable to RCOL, a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent. Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, 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 . . ., interest, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such royalties may be exempt from income tax or subject to a reduced rate of income tax to the extent required by any treaty obligation binding of the Philippines. Section 32 (B) (5) of the Code provides: "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: (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what you invoke is the Philippines-United Kingdom tax treaty. Paragraphs 1 and 2, Article 11 thereof provide: "Article 11 Royalties 1. Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films or tapes for television or radio broadcasting. b) in all other cases, 25 per cent of the gross amount of the royalties." Based on the above provisions, royalties arising in the Philippines and paid to a resident of the United Kingdom may be taxed in the Philippines at a rate not to exceed: (a) 15 percent of the gross amount of the royalties if the royalties are paid by an enterprise registered with the Board of Investments and engaged in preferred areas of activity, or if the royalties are paid in respect of cinematograph films or tapes for television or radio broadcasting, and (b) 25 percent of the gross amount of the royalties in all other cases. Accordingly, inasmuch as RBHP, the company paying the royalties, is not registered with the Board of Investments as such, and the royalties payable to RCOL are not in respect of cinematograph films or tapes for television or radio broadcasting, such royalties to be paid by RBHP to RCOL under the Agreement, as amended, beginning March 1, 2011 3 are subject to income tax at the rate of 25 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 11 of the Philippines-United Kingdom tax treaty. (BIR Ruling No. 286-82 dated October 20, 1982; BIR Ruling No. DA-ITAD 49-08 dated July 9, 2008; BIR Ruling No. 75-08 dated October 29, 2008) B. On value-added tax Finally, the royalties are also subject to value-added tax (VAT) as follows: HEITAD "Section 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%). . ." With regard to the procedures for the withholding and the payment of VAT, RBHP, being the resident withholding agent and payor in control of payment, shall be responsible for the withholding of the final VAT at the rate of 12 percent on the royalties before making any payment to RCOL. In remitting the VAT withheld, RBHP 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 RBHP if it is a VAT-registered taxpayer. In case RBHP is a non-VAT-registered taxpayer, 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, RBHP is required to issue a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for RCOL and the fourth copy for RBHP as its file copy. (Section 4.114-2, Revenue Regulations (RR) No. 16-2005, as amended by RR No. 4-2007) 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. "Intellectual Property Rights" shall mean the Trademarks (including the service marks), Patents, Design and Model Rights. Know-How and all current and future copyrights and rights to databases relating to the design, production, distribution, marketing and sale of the Products. 2. "Products" shall mean the household, health and personal care products developed and prepared for launch by RCOL and subsequently launched and marketed by RBHP in accordance with standard practice as agreed between RCOL and RBHP. 3. Pursuant to Revenue Memorandum Order No. 72-2010 (Guidelines for the Processing of Tax Treaty Relief Application pursuant to Existing Philippine Tax Treaties). 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.