ITAD BIR Ruling No. 144-13

May 21, 2013 ITAD BIR RULING NO. 144-13 Article 12, Philippines-Japan tax treaty Sycip Salazar Hernandez and Gatmaitan Attorneys-at-Law SSHG Law Center 105 Paseo de Roxas, Makati City Attention: Atty. Rolando V. Medalla, Jr. Atty. Benedicto P. Panigbatan Atty. Nestle C. Lizardo Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 5, 2010 requesting confirmation that royalties paid by Pilipinas NM, Inc. ("Pilipinas NM") to Nippon Sheet Glass Company Ltd. ("Nippon Sheet Glass") are subject to income tax at the rate of 10 percent pursuant 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 ("Philippines-Japan tax treaty") . TADcCS Facts Nippon Sheet Glass is a foreign corporation and a resident of Japan based on the Certification of Residence and the Certificate of Status of Taxable Person issued by the Shiba Tax Office in Japan on November 19 and 20, 2010, respectively. Nippon Sheet Glass is located at 5-27, Mita 3-chome, Minato-ku, Tokyo, Japan. It 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 June 15, 2010. On the other hand, Pilipinas NM is a domestic corporation located at EPZA Drive corner 11th Street, FCIE Langkaan, Dasmarias, Cavite, Philippines. It is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise under Certificate of Registration No. 95-95 issued on September 20, 1995. On July 6, 2007, Nippon Sheet Glass and Pilipinas NM entered into a Technology Transfer Licensing Agreement where Nippon Sheet Glass granted Pilipinas NM a non-exclusive license to manufacture and sell glass mat and leaf separators for batteries by utilizing relevant technology and know-how developed by and belonging to Nippon Sheet Glass . In consideration, Pilipinas NM will pay royalties to Nippon Sheet Glass equivalent to 2 1/2 percent of its net sales of the licensed products. The royalties are computed every six months from April to September and from October to March of the following year and payable within sixty days after the end of March and September. The Agreement took effect on July 16, 2007 and will be in effect for five years or up to July 15, 2012. The parties may renew the Agreement thereafter. The Agreement complied with the provisions of the Intellectual Property Code of the Philippines on Voluntarily Licensing under Certificate of Compliance No. 5-2007-00076 issued by the Intellectual Property Office on July 11, 2007, valid for five years from July 16, 2007 to July 15, 2012. Based on the submitted Annual Information Return of Income Taxes Withheld on Compensation and Final Withholding Taxes (1604-CF) and Monthly Remittance Returns of Final Income Taxes Withheld (BIR Form No. 1601-F), Pilipinas NM had paid royalties to Nippon Sheet Glass and withheld income tax thereon as follows: SDTIHA Date of Payment Amount of Date of Payment Amount of Rate of Income of Royalties Royalties of Income Tax Income Tax Paid Tax Applied (in Pesos) on Royalties (in Pesos) Jan. 2009 331,217.60 Feb. 10, 2009 82,804.40 25 percent Feb. 2009 315,241.28 Mar. 10, 2009 78,810.32 25 percent Mar. 2009 226,872.92 Apr. 14, 2009 56,718.23 25 percent Apr. 2009 222,178.92 May 11, 2009 55,544.73 25 percent May 2009 314,570.60 Jun. 10, 2009 78,642.65 25 percent Jun. 2009 324,125.08 Jul. 10, 2009 81,031.27 25 percent Jul. 2009 399,425.68 Aug. 10, 2009 99,856.42 25 percent Aug. 2009 276,075.36 Sep. 9, 2009 69,018.84 25 percent Sept. 2009 306,099.28 Oct. 12, 2009 76,524.82 25 percent Oct. 2009 461,395.12 Nov. 11, 2009 115,348.78 25 percent Nov. 2009 346,078.96 Dec. 10, 2009 86,519.74 25 percent Dec. 2009 311,834.88 Jan. 14, 2010 77,958.72 25 percent Jan. 2010 454,738.72 Feb. 9, 2010 113,684.68 25 percent Feb. 2010 361,366.84 Mar. 10, 2010 90,341.71 25 percent Mar. 2010 477,703.64 Apr. 14, 2010 119,425.91 25 percent Apr. 2010 388,717.20 May 14, 2010 97,179.30 25 percent May 2010 221,089.76 - 55,272.44 25 percent Ruling 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 fifteen 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 is 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: DTIcSH "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 . ASaTHc 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) This decision of the Court of Tax Appeals is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. Furthermore, the 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 of the foregoing, since the Technology Transfer Licensing Agreement that gives rise to the royalties has been in effect since July 16, 2007 , but the relevant TTRA was filed only on July 5, 2010 , this Office hereby DENIES relief on all royalties paid by Pilipinas NM to Nippon Sheet Glass before July 20, 2010 , 1 pursuant to Section III (2) of RMO 1-2000. Accordingly, said royalties shall be subject to income tax under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, to wit: "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 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%)." DHcEAa Relative thereto, Pilipinas NM shall be subject to deficiency income tax on royalties it paid to Nippon Sheet Glass from January 2009 to May 2010 where, based on the BIR Forms submitted, it already applied a preferential rate of 25 percent even if it has not yet filed the relevant TTRA at any of those times. The deficiency income tax is computed as follows: Date of Amount of Preferential Regular Rate Difference Amount of Payment of Royalties Rate of of Income Tax Deficiency Royalties (in Pesos) Income Tax Income Tax Applied (in Pesos) Jan. 2009 331,217.60 25 percent 30 percent 5 percent 16,560.88 Feb. 2009 315,241.28 25 percent 30 percent 5 percent 15,762.06 Mar. 2009 226,872.92 25 percent 30 percent 5 percent 11,343.65 Apr. 2009 222,178.92 25 percent 30 percent 5 percent 11,108.95 May 2009 314,570.60 25 percent 30 percent 5 percent 15,728.53 Jun. 2009 324,125.08 25 percent 30 percent 5 percent 16,206.25 Jul. 2009 399,425.68 25 percent 30 percent 5 percent 19,971.28 Aug. 2009 276,075.36 25 percent 30 percent 5 percent 13,803.77 Sept. 2009 306,099.28 25 percent 30 percent 5 percent 15,304.96 Oct. 2009 461,395.12 25 percent 30 percent 5 percent 23,069.76 Nov. 2009 346,078.96 25 percent 30 percent 5 percent 17,303.95 Dec. 2009 311,834.88 25 percent 30 percent 5 percent 15,591.74 Jan. 2010 454,738.72 25 percent 30 percent 5 percent 22,736.94 Feb. 2010 361,366.84 25 percent 30 percent 5 percent 18,068.34 Mar. 2010 477,703.64 25 percent 30 percent 5 percent 23,885.18 Apr. 2010 388,717.20 25 percent 30 percent 5 percent 19,435.86 May 2010 221,089.76 25 percent 30 percent 5 percent 11,054.49 Total 286,936.59 ========= On the other hand, royalties paid to Nippon Sheet Glass on July 20, 2010 and thereafter are subject to a reduced rate of income tax under paragraphs 1, 2 and 4, Article 12 of the Philippines-Japan tax treaty, as amended by a Protocol, 2 to wit: EcDSHT "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. 3 xxx xxx xxx 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 and films or tapes for radio or television broadcasting, any patent, trade mark, 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." Under Article 12, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 15 percent if the royalties are paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting, and (b) 10 percent in all other cases. 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 work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, 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 ( "know-how" ). Accordingly, since the royalties paid by Pilipinas NM to Nippon Sheet Glass under the Agreement for the use of the relevant technology and know-how to manufacture glass mat and leaf separators for batteries are payments or royalties for the use of know-how , and not for the use of cinematograph films and films or tapes for radio or television broadcasting, such royalties paid to Nippon Sheet Glass on July 20, 2010 and thereafter shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty. cITCAa Furthermore, under Section 108 (A) of the Tax Code, the said royalties for the use of know-how in the Philippines are generally subject to value-added tax ("VAT"), to wit: "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%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: 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%). . ." However, since Pilipinas NM is registered with PEZA and entitled to fiscal incentives under Republic Act No. 7916 , 5 the Supreme Court, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) , ruled that: "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: First, 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. ATCEIc 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." Accordingly, since Nippon Sheet Glass , the nonresident lessor of the subject know-how, is not a VAT registered taxpayer, the royalties paid to it by Pilipinas NM shall be treated, for VAT purposes, as exempt and not subject to zero percent VAT; in either case, no output VAT is shifted or passed on to Pilipinas NM. 5 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. July 20, 2010 is the fifteenth day after the filing of the TTRA on July 5, 2010 . 2. 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 . 3. The original rate was 25 percent. 4. The VAT rate is increased to twelve percent 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. 5. Entitled An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes . 5. Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended, provides: "SEC. 4.106-5. Zero-Rated Sales of Goods or Properties . A zero-rated sale of goods or properties (by a VAT-registered person) is a taxable transaction for VAT purposes, but shall not result in any output tax. However, the input tax on purchases of goods, properties or services related to such zero-rated sale, shall be available as tax credit or refund in accordance with these Regulations." "SEC. 4.109-1. VAT-Exempt Transactions . (A) In general. 'VAT-exempt transactions' refer to the sale of goods or properties and/or services and the use or lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases. The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT." n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.