ITAD BIR Ruling No. 146-15

May 4, 2015 ITAD BIR RULING NO. 146-15 Article 12, Philippines-Singapore Tax Treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Fidela Isip-Reyes Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on April 23, 2012, on behalf of FISH & CO. RESTAURANTS PTE. LTD. (" Fish & Co. ") requesting confirmation that the royalties paid by BIG FISH RESTAURANT CONCEPTS, INC. (" Big Fish ") to Fish & Co. are subject to a 25% preferential tax rate pursuant to the provisions of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . It is represented that Fish & Co. , with business address at 1 Jalan Kilang Timor, #06-01, Singapore, is a corporation organized and existing under the laws of Singapore and is a resident thereof per Residence Certificate issued by the Assistant Commissioner, Corporate Tax Division of the Inland Revenue of Singapore on February 7, 2012; that it is not registered either as a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 23, 2012; that Fish & Co. is engaged in the business of operating a chain of seafood restaurants under the business name of Fish & Co. ; that it owns proprietary marks and a system of restaurants operations for its own use and its franchisees; that, on the other hand, Big Fish is a corporation organized and existing under the laws of the Philippines with its place of business at 2176 Primo Rivera Street, La Paz, Makati City; and that it is engaged in the business of the promotion and operation of restaurant establishments in the Philippines. It is further represented that sometime on January 2012, Fish & Co. and Big Fish entered into Franchise Agreement ("Agreement") , which shall commence on the date of execution and shall continue in force thereafter for a period of three (3) years, whereby Fish & Co. grants to Big Fish the following rights: a) an exclusive right to set-up and construct restaurants trading under the name of Fish & Co. in the Philippines in accordance with the Schedule 2 of the Agreement and the use of distinctive business format and method developed and implemented by Fish & Co. restaurant in connection with the operation of the business utilizing and comprising the trademarks, trade dress, trade names, copyrights, materials, patents, designs, know-how, information, drawings, plans, shop layout and decoration, colour schemes, lighting and sound system, staff uniforms, all other identifying materials and property rights which may subsist in any part of the world owned by or available to Fish & Co. adopted or designated now or at any time hereafter by Fish & Co. for use in connection with the business of Fish & Co. Restaurants ; and b) a non-exclusive right to use, solely in conjunction with the business of Fish & Co. , the Proprietary marks belonging to Fish & Co. and appearing in connection with the business or on products or services arranged or provided by Fish & Co. as Fish & Co. may from time to time make available to Big Fish . That for and in consideration of the rights granted under the Agreement, Big Fish shall pay (a) Opening Fee equivalent to S$100,000 for each restaurant; and (b) monthly royalty payments in the aggregate amount of four percent (4%) of the prior month's gross monthly sales of each Fish & Co. Restaurant ; and that royalties covering the period from May to June 2012 were remitted to Fish & Co. by Big Fish on July 31, 2012 as evidenced by an Affidavit issued by Big Fish . Furthermore, it is represented that the issue or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved per Certification issued by Big Fish dated January 30, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: "Section 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 . . ., royalties, . . ., profits and income . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 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." In accordance with the foregoing, Article 12 of the Philippines-Singapore tax treaty 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. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) in the case of the Philippines, 15 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 and also royalties in respect of cinematographic films or tapes for television or broadcasting; b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; c) in all other cases, 25 per cent of the gross amount of the royalties. 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 work, including cinematographic films or tapes for television or 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. 4. The provisions of paragraphs 1 and 2 of this Article 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 of this Agreement, as the case may be, shall apply." According to paragraph 2, royalties arising in the Philippines derived by a resident of Singapore are subject to either (a) 15 percent of the gross amount of royalties paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; or (b) 25 percent in all other cases. Inasmuch as Fish & Co. is a resident of Singapore with no fixed place of business in the Philippines, and Big Fish is not registered with the BOI as engaged in preferred areas of activities in the Philippines, as required for the availment of the preferential tax rate of 15 percent in accordance with the above-quoted Article 12 (2) (a), royalties arising in the Philippines and payable to Fish & Co. under the subject Agreement are subject to Philippine tax at the rate of 25 percent of the gross amount of royalties pursuant to Article 12 (2) (c) of the Philippines-Singapore tax treaty. Moreover, as provided in Section 108 of the Tax Code of 1997, the said royalty payments are subject to value-added tax (VAT): "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%) 1 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" With regard to the procedures for the withholding and the payment of the VAT pursuant to Sections 4 and 6 of Revenue Regulations No. 4-2002, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, Big Fish shall be responsible for the withholding of VAT on the royalties before remitting them to Fish & Co. In remitting to the Bureau of Internal Revenue the VAT withheld, Big Fish shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, Big Fish may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying such form. On the other hand, if it is a non VAT-registered taxpayer, Big Fish may include as part of the cost of the royalty fees to it by Fish & Co. the VAT consequently shifted or passed on to it. In addition, Big Fish is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Fish & Co. and the fourth copy for Big Fish as its file copy. 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. 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.