ITAD BIR Ruling No. 129-14

July 22, 2014 ITAD BIR RULING NO. 129-14 Article 12, Philippines-Japan tax treaty, in relation to the Amending Protocol signed on December 9, 2006, and effective January 1, 2009 Nonato & Nonato Law Offices Rm. 406 Tulips Center A.S. Fortuna St., Bakilid Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Authorized Representative Gentlemen : This refers to your letter dated June 20, 2009, on behalf of your client, Yamashin-Filter Corporation (Yamashin Japan) , requesting confirmation of your opinion that the royalty payments made by Yamashin Cebu Filter Manufacturing Corporation (Yamashin Philippines) to Yamashin Japan under the Technical Support and Service Agreement entered into by Yamashin Japan and Yamashin Philippines on June 16, 2009 shall be subject to the 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 as amended by a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that Yamashin Japan is a foreign corporation organized and registered under the laws of Japan and is a resident thereof as evidenced by the Certificate of Residence issued by Naoto Yanagihara, District Director of Yokohamanaka Tax Office dated May 8, 2009; that its principal office address is at 15th Floor, Nisseki-Yokohama Bldg. 1-1-8 Sakuragi-Cho, Naka-Ku, Yokohama, Kanagawa, Japan; that it is not registered either as a corporation or as a partnership in the Philippines per certification dated June 24, 2009 issued by the Securities and Exchange Commission; that Yamashin Philippines is a corporation duly organized and existing under and by virtue of Philippine laws, with principal office address at Mactan Economic Zone II-Special Economic Zone, Basak, Lapulapu City, Cebu; that Yamashin Philippines is engaged in the business of manufacturing for oil, air and fuel filters for hydraulic or industrial uses. ESIcaC It is further represented that Yamashin Japan and Yamashin Philippines entered into a Technical Support and Service Agreement on June 16, 2009, whereby Yamashin Japan grants Yamashin Philippines exclusive rights in the Philippines technical advice, 2 design cooperation, 3 information, quality control, project evaluation, experience and business support 4 for the production and manufacture of filters; that, in consideration for the license of the abovementioned rights, Yamashin Philippines shall pay Yamashin Japan a fee equivalent to Three Hundred Sixty Five Thousand Japanese Yen (JP365,000.00) currency each month effective April 1, 2009 to September 30, 2009; and that the issue/s or transaction subject of the above request for ruling is not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides, 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." aATESD However, Philippines-Japan tax treaty, in its Article 12, as amended, provides, viz. : "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 per cent 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 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx" Under the existing Philippines-Japan tax treaty, royalty payments will be taxed at a preferential rate of 15 percent 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 and 10 percent in all other cases. Accordingly, since Yamashin Japan's royalty payments are not in respect of the use or right to use cinematograph films and films or tapes for radio or television broadcasting, this Office of the opinion and so holds that the said payments by Yamashin Philippines to Yamashin Japan under the Agreement are subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to Article 12 of the Philippines-Japan tax treaty, as amended. CAIHaE As regards the imposition of the VAT on the royalty fees to Yamashin Japan , please be informed further that Section 108 of the Tax Code of 1997, as amended by Republic Act No. 9337, 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: xxx xxx xxx" However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz. : AHcaDC "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: . . ., 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. 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. xxx xxx xxx" Such being the case, the payment of royalty fees by Yamashin Philippines , being a PEZA-registered enterprise, to Yamashin Japan under the Agreement should be, as it is hereby confirmed to be, exempt from VAT. aTHASC 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. Protocol Amending the 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 effective January 1, 2009. 2. Refers to the provision or written technical instructions and information as regards production, assembly and manufacture of filters. 3. Refers to the cooperation in making the necessary designs and application for the manufacture and marketing of filters to be sold during the period of the Agreement. 4. Refers to all the activities with regard to the sale and marketing of filters as well as the support for the contract awards or acquisition and information. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.