ITAD BIR Ruling No. 153-13

June 14, 2013 ITAD BIR RULING NO. 153-13 Article 12, Philippines-Japan tax treaty Isla Lipana and Co. 29th Floor, Philamlife Tower Makati City Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on February 13, 2009 requesting confirmation that royalties paid by Panasonic Precision Devices Philippines Corporation ("Panasonic Precision Philippines") to Panasonic Communications Company Ltd. ("Panasonic Communications") are subject to a reduced rate of income tax 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") , as amended by a Protocol 1 effective January 1, 2009. Facts Panasonic Communications is a foreign corporation and a resident of Japan based on its Residence Certificate issued by the Hakata Tax Office in Japan on January 14, 2009. Panasonic Communications is located at 1-62, 4-chome, Minoshima Hakata-ku, Fukuoka, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission ("SEC") on February 11, 2009. On the other hand, Panasonic Precision Philippines is a domestic corporation located at Lot C3-8, Carmelray Industrial Park II, Barangay Punta, Calamba City, Laguna, Philippines. It is originally known as Kyushu Matsushita Electric Corporation of the Philippines and registered with the SEC under Company Registration No. A20013276. It is registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise under Certificate of Registration No. 00-075 issued on September 8, 2000. It subsequently changed its name to Panasonic Communications Corporation of the Philippines; Panasonic Communications Philippines Corporation; Panasonic System Networks Philippines Corporation ; and presently to Panasonic Precision Devices Philippines Corporation. 2 On September 1, 2007, Panasonic Precision Philippines and Panasonic Communications entered into a Manufacturing License Agreement where Panasonic Communications granted Panasonic Precision Philippines a limited, non-exclusive and nontransferable sublicense to reproduce software in machine executable format at its premises and sell them as an integral part of products under the name of Panasonic or of other original equipment manufacturers. The software consists of computer programs with monochrome or color features and forms an integral part of multi-function products. The software will be sold to Panasonic Corporation of Japan (formerly Matsushita Electric Industrial Company Ltd. ) or to other original equipment manufacturers and their customers and distributors. In consideration, Panasonic Precision Philippines will pay royalties to Panasonic Communications as follows: ICTHDE Licensed Software Products Per Unit Royalty Fees Peerless Systems Corporation DP-C213/C263/C323/C264/ 0.42 percent of suggested retail 1. PEERLESSPrintXL C353 price until exhaustion of prepaid version 2.0/2.1/3.0 royalties from Panasonic 2. PEERLESSPrint5E and 5C Communications. 3. PEERLESSPrint6 version 0.38 percent of suggested retail XL 2.1, an emulation of price after exhaustion of the said PCL6 royalties. 4. Release 3.0 or later of the DP-C265/C305/C405 0.38 percent of suggested retail PEERLESSPageTM Imaging price. Operating system with Phase 3 of the PEERLESS Memory Reduction Technology (MRT) Monotype Imaging, Inc. DP-C213/C263/C323/C264/ $20.90 1. Profiles C353 2. ColorSet CMM DP-C265/C305/C405 For Japanese: $28.90 3. Screens 4. UFST 5. Licensed Fonts: Silex Technology, Inc. DP-C213/C263/C323/C264/ 980.00 1. STI Embedded Network C353 Software DP-C265/C305/C405 2. Network Protocol Stack 3. Tool 4. Novell NDS Software Toshiba Information Systems DP-C213/C263/C323/C264/ 450.00 Corporation C353 1. Qt Computer Software DP-C265/C305/C405 The royalties are calculated quarterly and payable within thirty days after receipt of the relevant invoice from Panasonic Communications. The Agreement took effect on September 1, 2007 and continues in effect indefinitely. On October 1, 2008, Panasonic Precision Philippines and Panasonic Communications amended the Agreement through a Memorandum for the purpose of updating the list of the licensed software that will be reproduced by Panasonic Precision Philippines and their corresponding royalties. 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, as the case may be) 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: " 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. EcASIC 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." (Emphasis ours) This decision is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. Furthermore, this requirement 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 amended Agreement that gives rise to the royalties has been in effect since September 1, 2007 , but the relevant TTRA was filed only on February 13, 2009 , this Office hereby DENIES relief on all royalties paid by Panasonic Precision Philippines to Panasonic Communications before February 28, 2009 , 3 pursuant to Section III (2) of RMO 1-2000. Accordingly, said fees 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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." On the other hand, the brand license fees paid to Panasonic on February 28, 2009 and thereafter are subject to relief under Article 12 of the Philippines-Japan tax treaty, which provides: TCHEDA "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 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 of or the right to use 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. With respect to the right of Panasonic Precision Philippines to reproduce software in machine executable format at its premises and sell them as an integral part of products under the name of Panasonic or of other original equipment manufacturers, this transfer of copyright right in the software constitutes a royalty-generating transaction under Section 5 (a) (i) of Revenue Memorandum Circular No. 44-2005 (Taxation of Payments for Software) , which provides: "Section 5. Characterization of Transactions. The character of payments received in a transaction involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a. Transfer of copyright rights . A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: i. The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending ; xxx xxx xxx The determination of whether a transfer of a copyright right in a software is a sale or exchange of property is made on the basis of whether, taking into account all facts and circumstances, there has been a transfer of all substantial rights in the copyright. A transaction that does not constitute a sale or exchange because not all substantial rights have been transferred will be classified as a license generating royalty income ." (Emphasis ours) Accordingly, since the royalties paid by Panasonic Precision Philippines to Panasonic Communications are royalties for the use of copyright and not for cinematograph films and films or tapes for radio or television broadcasting, such royalties paid to Panasonic Communications on February 28, 2009 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. CScaDH Furthermore, under Section 108 (A) of the Tax Code, the said royalties for the use of copyright in the Philippines are 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: 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 Panasonic Precision Philippines is registered with PEZA and entitled to fiscal incentives under Republic Act No. 7916 , 5 as amended, the Supreme Court ruled, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) , 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. 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 Panasonic Communications , the nonresident lessor of the intangible property, is not a VAT registered taxpayer, the royalties paid to it by Panasonic Precision Philippines shall, for VAT purposes, be treated as exempt and not subject to zero percent VAT; in either case, no output VAT is shifted or passed-on to Panasonic Precision Philippines. 6 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. CSHEAI 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. 2. These changes were reflected in Panasonic Precision Philippines' amendments to its Articles of Incorporation as approved by the SEC on March 31, 2005 and October 14, 2011, and to its PEZA Certificate of Registration as approved on February 18, 2008. 3. February 28, 2009 is the fifteenth day of filing the TTRA on February 13, 2009. 4. The VAT rate was increased to 12 percent beginning 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. 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. 6. 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."