ITAD BIR Ruling No. 167-12

April 20, 2012 ITAD BIR RULING NO. 167-12 Article 12 (Royalties), Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-17-10 SGV & Co. 6750 Ayala Avenue 1226 Makati City Philippines Attention: Fabian K. delos Santos Partner, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 8, 2011 requesting confirmation that royalties to be paid by JT International (Philippines), Inc. ("JT Philippines") to JT International SA ("JT International") are subject to 15 percent preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). It is represented that JT International, with office address at Rue de la Gabelle 1, 1211 Geneve 26, is a limited company organized and existing under the laws of Switzerland and is a resident thereof within the meaning of the Philippines-Switzerland tax treaty based on the Certificate issued by the Tax Administration of the Republique Et Canton De Geneve dated April 26, 2011; that it is not registered either as a corporation or as a partnership in the Philippines based on the certification issued by the Securities and Exchange Commission (SEC) dated March 26, 2010; and that, on the other hand JT Philippines is a corporation duly organized and existing under laws of the Philippines with principal office at 27th and 29th Floor Discovery Centre, 25 ADB Avenue, Ortigas Center, Philippines. It is further represented that on January 1, 2009, JT International and JT Philippines entered into a Trade Mark Sub-License Agreement ("Agreement") whereby the former granted to the latter a non-exclusive right to manufacture, distribute and sell the Products 1 in the Territory; 2 that JT Philippines is authorized to sublicense its rights under the Agreement to third parties, subject to the following limitations: (a) the sublicense should be in writing on the same terms as the Agreement (but there shall be no further right to sublicense) and (b) JT Philippines guarantees the performance of the sublicensee; that in consideration of the license granted by JT International to JT Philippines , the latter agreed to pay the former a royalty fee, calculated by multiplying the Net Sales 3 by 5.5 percent, in US dollars or in alternative currency as may be agreed upon by JT Philippines and JT International on the 15th day of each calendar month following the due date for the delivery of the Statement ; 4 that this Agreement shall take effect from January 1, 2009 and shall continue for an initial period of 5 years from effective date, and will automatically be extended for successive periods of 5 years unless terminated in writing by either JT Philippines or JT International by giving a 90 days prior notice. It is finally represented that the royalties subject of the application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the General Manager of JT Philippines on April 5, 2010. HESAIT 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, to royalty payments derived in the Philippines by nonresident foreign corporations. 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 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" 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. xxx xxx xxx" In relation thereto, Article 12 of the Philippines-Switzerland tax treaty which you invoked may apply to the instant request. It 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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15 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 and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Under paragraph 3 Article 12 of the Philippine-Switzerland tax treaty, payments received as a consideration for the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience are considered royalties. Paragraph 2 of the same Article provides that royalties arising from sources within the Philippines and derived by a resident of Switzerland may be taxed in the Philippines, but, the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. AHECcT Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010, published in the Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides, as follows: "SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms of any necessary documents are submitted to any other BIR office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event . Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis supplied) In view thereof, since the TTRA was filed only on July 8, 2011 , after the date of effectivity of the Agreement which was on January 1, 2009, this Office hereby DENIES relief on all royalty payments under the Agreement made before the filing of the TTRA on July 8, 2011, in violation of the requirement under RMO 72-2010 that filing of the TTRA should be made BEFORE the transaction, that is the payment of royalties. Accordingly, said payments shall be subject to tax at the rate provided in Section 28 of the aforementioned Tax Code of 1997, as amended. On the other hand, the payments by JT Philippines to JT International from the time of filing of this application on July 8, 2011 , under the Agreement, being essentially royalties for the use or the right to use of trademark, patent, design, and utility model rights, are hereby GRANTED relief and are subject to income tax at the preferential rate of 15 percent of the gross amount thereof pursuant to the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD 17-10 dated August 11, 2010) Finally, as regards value-added tax (VAT), the royalties for the use Trade Mark to be paid by JT Philippines to JT International are subject to VAT pursuant to Section 108 (A) of the Tax Code of 1997, as amended, 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. CIAcSa . . . The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx" With regard to the procedures for the withholding and the payment of the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that JT Philippines shall be responsible for the withholding of the VAT on the royalties before remitting them to JT International. In remitting to the Bureau of Internal Revenue the VAT withheld on the royalties, JT Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from JT Philippines if it is a VAT-registered taxpayer. In case JT Philippines is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, JT Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for JT International and the fourth copy for JT Philippines 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. ADCETI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Products means packaged cigarettes and other tobacco products including cigars, roll your own tobacco and oral tobacco products including snus and their components bearing any of the Licensed Trade Marks or bearing any of the Trademarks and incorporating any of the Technical Information. 2. Territory means the geographical territory of the Philippines (but excludes all U.S. embassies, consulates and military installations for Products sold under the Licensed Trade Marks listed in Part B of Schedule A). 3. Net Sales means the total gross invoice amounts of Products billed to customers in the Territory by and or for JT Philippines during a calendar quarter (or, if greater, the payments received on any such invoice, excluding interest, whether received during the relevant quarter or thereafter), less lawful quantity discounts actually allowed and taken as such by customers and shown on the invoices, less allowances and any credits for returns actually made as supported by credit memoranda issued to customers, less taxes on sales, less excise tax, less cash considerations paid to customers that meet the requirements to be reported as a reduction of net sales in line with USGAAP EITF 01-9 (or any other accounting standard (such as IFRS) agreed by the parties to be the applicable accounting standard from time to time). No other deductions from Net Sales shall be allowed, including, without limitation, deductions for direct or indirect costs incurred in manufacturing, selling, advertising (including cooperative and promotional allowances) or distributing Products, or deductions for uncollected or uncollectible accounts. 4. Statement shows the following: number of Products manufactured; number of Products sold; number of Products returned to JT Philippines as damaged, stale, or otherwise unfit for sale; and number of Products inventory.