ITAD BIR Ruling No. 117-15

April 30, 2015 ITAD BIR RULING NO. 117-15 Article 12, Philippines-Spain tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Jules Riego Principal, Tax Advisory and Advocacy Group Gentlemen : This refers to your tax treaty relief application filed on December 20, 2012 requesting confirmation that the royalty payments made to Newrest Group Holding SL ("Newrest Spain") by Supply Oilfield & Marine Personnel Services, Inc., Supply Oilfield Services, Inc., SOS Transport & Logistics, Inc., SOS Marine & Environmental Services, Inc., Supply Oilfield Services (Subic), Inc., Oilfield Institute of Learning in Asia (Oil Asia), Inc. , collectively referred to as " PH Companies " are subject to preferential tax rate of 15 percent pursuant to the Convention between the Republic of the Philippines and Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ("Philippines-Spain tax treaty") . It is represented that Newrest Spain is a resident of Spain, based on the Certificate of Residence dated September 12, 2012, issued by the tax authorities of Spain, with address at AMB Barajas, Logistics Park Avenida Central, n42 M y N Madrid Spain; that Newrest Spain is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated December 7, 2012; that on the other hand, the PH Companies are domestic corporations with addresses as follows: Company Address Supply Oilfield & Marine Personnel Services, Inc. 19th-20th Floors Pearlbank Centre 146 Valero Street Salcedo Village, Makati City Supply Oilfield Services, Inc. 19th-20th Floors Pearlbank Centre 146 Valero Street Salcedo Village, Makati City SOS Transport & Logistics, Inc. 19th-20th Floors Pearlbank Centre 146 Valero Street Salcedo Village, Makati City SOS Marine & Environmental Services, Inc. 19th Floor Pearlbank Centre 146 Valero Street Salcedo Village, Makati City Supply Oilfield Services (Subic), Inc. Building 1031 Watercraft Venture Co. Rizal Highway, SBFPZ Olongapo City, Zambales Oilfield Institute of Learning in Asia (Oil Asia), Inc. 20th Floor Pearlbank Centre 146 Valero Street Salcedo Village, Makati City It is further represented that on December 14, 2012, Newrest Spain and the PH Companies entered into a Trademark License Agreement ("Agreement") whereby Newrest Spain granted the PH Companies a non-exclusive, non-transferable, non-assignable license to use the Mark in the Philippines for use in the on-shore and off-shore manpower supply, logistics and support services to gas and oil industry in the Philippines; that the PH Companies have no right to grant or sub-license all or part of their rights granted by Newrest Spain ; that the PH Companies shall have no right to include the Mark or any part of it in their corporate or trading names; that in consideration of the license granted, the PH Companies shall pay Newrest Spain a royalty fee equal to 1 percent of the total sales relating to the business. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides: "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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, such royalties may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Code provides: "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: 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." Thus, you invoke the Philippines-Spain tax treaty. With respect to royalties, Article 12 thereof 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. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, 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 with the Philippine Board of Investments and engaged in preferred areas of activities; b) 20 per cent in respect of cinematographic films or tapes for television or broadcasting; and c) 15 per cent of the gross amount of the royalties in all other cases. 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 works, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Where, owing to a special relationship between the payor and the recipient or between both of them and some other person, the amount of the royalties paid, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payor and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payment shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention." Under Article 12 of the Philippines-Spain tax treaty, royalties arising in the Philippines and paid to a resident of Spain may be taxed in the Philippines at a rate not to exceed a) 10 percent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; b) 20 per cent in respect of cinematographic films or tapes for television or broadcasting; and c) 15 per cent of the gross amount of the royalties in all other cases. Under paragraph 3 of Article 12, 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 works, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television. In this case, payments for the use of the Mark are not paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities nor in respect of cinematographic films or tapes for television or broadcasting, this Office is of the opinion and so holds that royalty payments made by PH Companies to Newrest Spain shall be treated as royalties subject to 15 percent of the gross amount thereof pursuant to Article 12 (2) (C) of the Philippines-Spain tax treaty. As regards the imposition of the VAT on royalties paid to PH Companies to Newrest Spain , please be informed further that Section 108 of the Tax Code of 1997 provides as follows: "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 twelve percent (12%) 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: xxx xxx xxx (2) The supply of scientific, technical or commercial knowledge information; xxx xxx xxx" Thus, the royalty payments made by PH Companies to Newrest Spain are subject to the 12% value-added tax (VAT) pursuant to Section 108 of the National Internal Revenue Code of 1997, as amended. Accordingly, PH Companies , being the payor in control of the payment shall be responsible for the withholding of VAT on the said royalty payments on behalf of Newrest Spain by filing a separate VAT return for and on behalf of Newrest Spain using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from PH Companies , if it is a VAT registered taxpayer. In case PH Companies is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, PH Companies is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Newrest Spain upon its request, and the fourth copy to be retained by PH Companies as its copy. [ Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07) ] 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.