ITAD BIR Ruling No. 146-11

May 10, 2011 ITAD BIR RULING NO. 146-11 Article 11 (Royalties), Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty; BIR Ruling No. 286-82 San Miguel Foods, Inc. 23rd Floor, The JMT Corporate Condominium ADB Avenue, Ortigas Center Pasig City Attention: Ms. Maria Soledad E. Olives Vice President and Manager-CPMSG Gentlemen : This refers to your application for tax treaty relief dated September 11, 2009 requesting confirmation that royalties to be paid by San Miguel Foods, Inc. ("San Miguel Foods") to Euromonitor International PLC ("Euromonitor") are subject to preferential tax rate of 15 percent pursuant to 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") . HESCcA Basic Facts It is represented that Euromonitor is a foreign corporation organized and existing under the laws of the United Kingdom and is a resident of the United Kingdom, based on the Certificate issued by the HM Revenue and Customs of the United Kingdom on July 7, 2009; that Euromonitor is situated at 60-61 Briton Street, London, England, United Kingdom; that Euromonitor 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 on October 15, 2009; that, on the other hand, San Miguel Foods is a domestic corporation, situated at the 23rd Floor, The JMT Corporate Condominium, ADB Avenue, Ortigas Center, Pasig City, Philippines; and that San Miguel Foods is registered with the Board of Investments ("BOI") under Certificate of Registration No. 2007-120 dated July 13, 2007, as a non-pioneer enterprise and new producer of dressed chicken. It is further represented that on August 21, 2007, San Miguel Foods and Euromonitor entered into a Corporate License Agreement where Euromonitor granted San Miguel Foods access to Euromonitor's Service via its website; that Service comprises of (i) the Intelligence, (ii) the tools and features which can be used to save or export the Intelligence into various formats and available from time to time on Euromonitor's website, and (iii) research support available to Authorized Users; that Intelligence means all and any part of the market reports, articles, written materials and data which are made available by the Service; that Authorized Users means (i) San Miguel Foods' employees whose usual place of work is at any of its Business Divisions, and (ii) any other person, firm or company whom San Miguel Foods requests and whom Euromonitor approves, provided such person, firm or company has signed an agreement with Euromonitor which shall include the Conditions of Use; 1 that San Miguel Foods and its employees as Authorized Users shall be granted access to the Service on or after the Start Date and as soon as Euromonitor has received two copies of the Agreement duly signed and dated by San Miguel Foods, while any other Authorized Users shall be granted access from such date and for such period as may be agreed between the parties; that each Authorized User may use the Service for the following purposes in connection with San Miguel Foods' business and in the following ways: Internal use: a) To browse and search the Service and to display the Intelligence on screen. b) To make and save digital copies of extracts from the Intelligence in any of the formats supported by the Service and to access and retrieve such copies. c) To print out copies of the Intelligence and to make photocopies of such print-outs for use in the course of performing his or her duties for San Miguel Foods. d) To make such digital copies and photocopies available to other Authorized Users. Limited third party redistribution: To create and redistribute to clients of San Miguel Foods and to other third parties new reports or other original material written by the Authorized User in the course of performing his or her duties ("New Material") which incorporate limited extracts from market reports, articles, written materials or datasets within the Intelligence. 2 CcAESI That in consideration, San Miguel Foods shall pay a fee to Euromonitor in accordance with the payment terms specified in the Key Terms Page of the Agreement; that Euromonitor reserves the right to make adjustments to the fee from to time to time on a fair and equitable basis if there is any material increase in the number of Authorized Users accessing the Service as the result of an increase in the size and composition of San Miguel Foods' Business Divisions following from a merger, takeover or other corporate reorganization affecting San Miguel Foods ; and that the Agreement will come into force on the Start Date and continue until the End Date. It is further represented that the Key Terms Page of the Agreement provides a) Service refers to Packaged Foods, Hot Drinks, Fresh Foods, Consumer Foodservice, Retailing, and Consumer Lifestyle. b) San Miguel Foods' Business Divisions means all those within San Miguel Corporation, San Miguel Pure Foods Company, Inc., San Miguel Foods, Inc., San Miguel Mills, Inc., The Purefoods Hormel Company, Inc., Magnolia, Inc., Monterey Foods Corporation and San Miguel Super Coffee Mix Company, Inc. c) Start Date means August 15, 2007, and End Date means August 14, 2008. d) Fee means US$24,800.00, 60 percent of which is payable within 30-45 days from the date of invoice, and the remaining 40 percent payable on or before January 31, 2008. That on October 2, 2008, San Miguel Foods and Euromonitor entered into the first Addendum to the Corporate License Agreement where both parties agreed to replace the Key Terms Page of the Agreement with the following: a) Service refers to Packaged Foods and Consumer Lifestyle and (Singapore, Thailand, Vietnam), Hot Drinks (Philippines), Consumer Foodservice (Indonesia, Philippines, Vietnam), and Retailing (Indonesia, Philippines, Vietnam). b) San Miguel Foods' Business Divisions means all those within San Miguel Corporation, San Miguel Pure Foods Company, Inc., San Miguel Foods, Inc., San Miguel Mills, Inc., The Purefoods Hormel Company, Inc., Magnolia, Inc., Monterey Foods Corporation and San Miguel Super Coffee Mix Company, Inc. c) Start Date means August 15, 2008, and End Date means August 14, 2009. HaAISC d) Fee means US$30,189.00, 60 percent of which is payable within 30 days from the receipt of invoice, and the remaining 40 percent payable on or before January 31, 2009. That on August 27, 2009, San Miguel Foods and Euromonitor entered into the second Addendum to the Corporate License Agreement where both parties agreed to replace again the Key Terms Page of the Agreement with the following: a) Service refers to Packaged Foods, Consumer Lifestyle and Countries and Consumer (Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam), Hot Drinks (Philippines), Consumer Foodservice (Indonesia, Philippines, Vietnam), and Retailing (Indonesia, Philippines, Vietnam). b) San Miguel Foods' Business Divisions means all those within San Miguel Corporation, San Miguel Pure Foods Company, Inc., San Miguel Foods, Inc., San Miguel Mills, Inc., The Purefoods Hormel Company, Inc., Magnolia, Inc., Monterey Foods Corporation and San Miguel Super Coffee Mix Company, Inc. c) Start Date means August 15, 2009, and End Date means August 14, 2010. d) Fee means US$34,699.00, 60 percent of which is payable within 30 days from the receipt of invoice, and the remaining 40 percent payable on or before January 31, 2010. It is finally represented that the transaction subject of the application for tax treaty relief is 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, based on the Sworn Statement issued by the Vice President and Treasurer of San Miguel Foods on September 11, 2009. Ruling A. On income tax In reply, please be informed that a foreign corporation like Euromonitor, whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code of 1997") , as amended, provides: HCSEIT "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by Euromonitor may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, 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: (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 for this purpose is the Philippines-United Kingdom tax treaty. Paragraphs 1, 2 and 3, 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: TIaCcD 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. 3. The term 'royalties' as used in this Article means payment 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." 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 but the rate of income tax that may be imposed thereon shall not 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, since San Miguel Foods , although registered with the Board of Investments, is not engaged in preferred (or pioneer) areas of activity in the Philippines as determined by the Board, and since the fee or royalty to be paid by San Miguel Foods to Euromonitor under the Corporate License Agreement and the first and second Addendums are not with respect to the use or the right to use of cinematograph films or tapes for television or radio broadcasting, but is essentially with respect to the use or the right to use of information concerning industrial, commercial or scientific experience ("know-how") , such royalty or fee is therefore subject to income tax at the rate of 25 percent (and not to 15 percent as you requested) 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) B. On value-added tax Finally, the royalty or fee to be paid to Euromonitor, being payment for the use or lease of (intangible) property in the Philippines, is subject to value-added tax (VAT) 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 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, raise the rate of value-added tax to twelve percent (12%) . . ." 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. Conditions of Use means the conditions of use for the service which specify the permitted uses and restrictions of the Intelligence. 2. This creation and redistribution right is subject to three conditions: (i) that the quantitative amount of any such extract from the Intelligence which is reproduced in any New Material does not exceed the permitted percentage of the total quality of that New Materials, (ii) that any such limited extracts are accurately reproduced in the New Material, and any conclusions which appear in the New Material and which are based on or refer to such extracts, accurate, fair and reasonable, and (iii) that New Materials are not used in a way that could be deemed competitive with Euromonitor.