ITAD BIR Ruling No. 134-13

May 14, 2013 ITAD BIR RULING NO. 134-13 Article 12, Philippines-Korea tax treaty Samdo Multimedia Corp. E1602B, Tektite East Tower, Exchange Road, Ortigas Center Pasig City Attention: Joseph Um President Gentlemen : This refers to your Tax Treaty Relief Application filed on August 10, 2010, on behalf of MUNHWA BROADCASTING CORP. ("Munhwa") , requesting clarification as to the applicable tax rate on the royalties to be paid by SAMDO MULTIMEDIA CORP. ("Samdo") to Munhwa under the Program Supply Agreement as provided in the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty") . It is represented that Munhwa, with office address at 31, Yeouido-dong, Yeongdeungpo-gu, Seoul, Korea, is a resident of Korea within the meaning of Article 4 of the Philippines-Korea tax treaty, as evidenced by the Certificate of Business Registration issued by the Yeongdeungpo Tax Office dated October 22, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission dated May 4, 2010; and that, on the other hand, Samdo is a corporation organized and existing under and by virtue of the laws of the Philippines with office address at E1602, Tektite East Tower, Exchange Road, Ortigas Center, Pasig City. It is further represented that on July 1, 2010, Munhwa and Samdo entered into a Program Supply Agreement ("Agreement") , whereby Munhwa grants Samdo the right to use and broadcast Munhwa copyrighted television programs, as well as use Munhwa logo for a period of one year from the date of the execution of the Agreement; that in consideration of the right granted, Samdo shall pay a monthly broadcast fee of US$2,500; and that, per the Bank of the Philippine Islands Debit Memo, an amount of US$3,794.65 was remitted by Samdo to Munhwa on September 2, 2012 as subscription payment of the former to the latter for August and September 2010. EICDSA It is finally represented that the 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 based on the Certification of Samdo dated September 5, 2011. 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. . . " (Underscoring 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. CTDacA 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. " (Underscoring ours) 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. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 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 thereof, since the TTRA was filed on August 10, 2010, after the date of effectivity of the Agreement on July 1, 2010, in violation of the 15-day period prescribed under RMO 1-2000, this Office hereby DENIES relief on royalties paid by Samdo to Munhwa before August 25, 2010. 1 Said royalties shall be subject to 30 percent income tax under Section 28 (B) (1) of the 1997 National Internal Revenue Code ("Tax Code"), to wit: THcaDA "Section 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). . . ." However, this Office hereby GRANTS relief on royalty payments of Samdo to Munhwa made on August 25, 2012 and thereafter. Accordingly, inasmuch as Munhwa is neither registered with the BOI nor engaged in preferred areas of activities in the Philippines, said royalty payments shall be subject to a reduced rate of 15 percent of the gross amount thereof, pursuant to Article 12 of the Philippines-Korea tax treaty. It 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 if such resident is the beneficial owner of the royalties. 2. However, such royalties may be taxed in the Contracting 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 15 per cent of the gross amount of the royalties. 3. Notwithstanding the provisions of paragraph 2 hereof, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Korea, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. HCEaDI 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or right to use, any copyright of literary, artistic or scientific work, 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 or tapes for the use of radio broadcasting. . . ." Moreover, the above royalty payments shall be subject to value-added tax ("VAT") as provided for in Section 108 of the Tax Code, 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%) 2 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, Samdo, 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 Munhwa. In remitting the VAT withheld, Samdo 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 Samdo if it is a VAT-registered taxpayer. In case Samdo 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, Samdo is required to issue BIR Form No. 2306 (Certificate of Final Tax Withheld at Source) in quadruplicate, the first three copies for Munhwa and the fourth copy for Samdo 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) cEAaIS 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. August 25, 2012 is the fifteenth (15th) day from date of filing the TTRA. 2. 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.