ITAD BIR Ruling No. 162-13

June 14, 2013 ITAD BIR RULING NO. 162-13 Article 12, Philippines-Japan tax treaty, as amended Bernaldo Directo & Po Law Offices Unit 1807 Cityland Condominium 10-Tower 1 6815 Ayala Avenue cor. H.V. dela Costa St. Makati City Attention: Pepito G. Po Partner Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on May 11, 2010, on behalf of your client, TS TECH TRIM PHILIPPINES, INC. ("TTTPI"), requesting confirmation that: STDEcA 1. Royalty payments made by TTTPI to TS TECH CO., LTD. ("TSCL") beginning January 1, 2007 pursuant to their License and Technical Assistance Agreement are subject to the preferential tax rate under Article 12 (2) (b) of 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") ; and 2. Said payments are not subject to value-added tax ("VAT"). It is represented that TSCL is a foreign company engaged primarily in the manufacture, distribution, import and export of automobiles, construction machinery, railway vehicles, and seat, interior equipment, parts, and appliances for amusement vehicles; that TSCL is organized and existing under the laws of Japan, with principal address at 3-7-27, Sakae-cho, Asaka-shi, Saitama, Japan; 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 April 20, 2010; that, on the other hand, TTTPI is a corporation duly organized and existing under and by virtue of the laws of the Philippines, and is registered with the Philippine Economic Zone Authority ("PEZA") under Certificate of Registration No. 94-94, dated January 20, 1998; that TTTPI's principal office address is at 102 Technology Avenue, Laguna Technopark, SEPZ Bian, Laguna; and that TTTPI is a wholly owned subsidiary of TSCL and is engaged in the business of manufacturing, selling, exporting or otherwise dealing in car seat, and trim covers and other goods, wares and/or merchandise, including the export of Philippine indigenous goods and materials. It is further represented that on January 1, 2007, TSCL and TTTPI entered into a License and Technical Assistance Agreement ("Agreement"), whereby TSCL grants TTTPI an indivisible, non-transferable and non-exclusive right and license to manufacture, assemble and sell the Products 1 within the Territory 2 by using the Know-How; 3 that, in consideration for the grant of license, TTTPI shall pay TSCL royalty fees in the amount corresponding to three one-hundredths (3%) times the cost, the cost 4 being the sales prices of the Products less the total purchase prices of the following parts: (a) parts supplied by a customer of TTTPI; (b) all the returns during a particular Royalty Period; 5 (c) CIF prices of and customs duties and import charges upon imported parts purchased from TSCL; and, (d) other physical distribution expenses; that the payment of the total amount of royalties during the three (3)-month period ending on the last day of March, June, September and December every year shall be made as per a bill rendered by TSCL; that the Agreement shall be in full force and effect for a period of five years and shall be automatically renewed and continued from year to year unless TSCL or TTTPI gives to the other party a written notice to terminate the Agreement; that based on Certificate of Compliance No. 5-2007-00005 issued by the Intellectual Property Office of the Philippines dated July 6, 2007, which is valid for five years from January 1, 2007 to December 31, 2011, the Agreement complies with the provisions of Sections 87 and 88 of Chapter IX, Part II of the Intellectual Property Code (Republic Act No. 8293) on Voluntary Licensing; and that the issue/s or 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 TTTPI dated May 12, 2010. Finally, as proof of payment of royalties made after the filing of the herein TTRA on May 11, 2010 and thereafter, copies of bank telegraphic transfers of payments were submitted showing, in detail, the outward royalty payments of TTTPI to TSCL from May 25, 2011 and thereafter. 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. 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. cDCSTA 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 of the foregoing, since the Agreement that gives rise to the royalties is in effect from January 1, 2007 to December 31, 2011, and renewable thereafter, and the subject TTRA was filed only on May 11, 2010, in violation of the 15-day period prescribed under RMO 1-2000, this Office hereby DENIES relief on those royalties paid by TTTPI to TSCL before May 26, 2010 . 6 Said royalties shall be subject to income tax at the rate provided under Section 28 (B) (1) of the 1997 National Internal Revenue Code ("Tax Code"), to wit: "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, with respect to royalties paid by TTTPI to TSCL on May 26, 2010 and thereafter, this Office hereby GRANTS relief on the royalties where they shall be subject to income tax at the reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 13 of the Philippines-Japan tax treaty, as amended, thus: "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" On the matter of imposing VAT, transfer of technical know-how is generally subject to VAT pursuant to Section 108 (A) of the Tax Code of 1997, as amended, which provides: "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%) [now 12%] of gross receipts derived from the sale or exchange of services, including the use or lease of properties . . . However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005), the Supreme Court 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. EaDATc 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 TTTPI is an enterprise registered with PEZA operating within an economic zone and as such is an exempt entity, it can neither be directly charged with VAT nor indirectly made to bear, as added cost, the equivalent VAT. Thus, the royalty fees to be paid by TTTPI to TSCL under the Agreement as consideration for the transfer of know-how are hereby confirmed to be exempt from VAT. 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. "Products" shall mean the seats and interior parts for motorcycles and automobiles to be manufactures by such an automaker as may from time to time be decided by HONDA CARS PHILIPPINES, INC. and ISUZU PHILIPPINES CORPORATION in writing, the specific models and types thereof, which may from time to time be decided, as listed in the Exhibit attached to the Agreement (and agreed upon by the Parties on March 27, 2006). 2. "Territory" shall mean the Republic of the Philippines. 3. "Know-How" shall mean any and all secret designs, drawings, specifications, technical records, material lists, process manual and all materials and documents containing other technical date, information, formulas and knowledge (excluding Intellectual Property Rights) relating to the Products, which TSCL owns from time to time or deems as necessary for the manufacture, assembly and sale of the Products. 4. The cost shall be calculated based on the sales prices and purchase prices effective at the beginning of the Royalty Period. 5. "Royalty Period" refers to the three (3)-month periods ending on the last day of March, June, September and December every year when the royalties due to TSCL shall be paid. 6. May 26, 2012 is the 15th day from the TTRA filing date.