ITAD BIR Ruling No. 182-15

June 3, 2015 ITAD BIR RULING NO. 182-15 Article 12, Philippines-Singapore tax treaty Tantoco Villanueva De Guzman & Llamas Law Offices 4th & 6th Floors Filipino Building 135 Dela Rosa Street Legaspi Village, Makati City Attention: Atty. Cristina Magdalena F. Villanueva Atty. Melissa Suzette L. Banzon Gentlemen : This refers to your application for tax treaty relief filed on April 20, 2012, on behalf of CHERRY CREDITS PTE. LTD. (" Cherry ") requesting confirmation that the royalty payments by LEVEL UP!, INC. (" Level Up ") to Cherry are subject to the 15 percent preferential tax rate 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 Cherry is a corporation duly organized and existing under the laws of Singapore and is a resident of Singapore per Certificate of Residence issued by the Inland Revenue Authority of Singapore on March 6, 2012; that Cherry is not registered either as a corporation or as a partnership as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated March 9, 2012; that Cherry is engaged in providing a reliable and secure, 24/7 real-time payment solution to bridge the transaction barrier, monetizing merchants' products globally; that, on the other hand, Level Up is a domestic corporation duly organized and existing under Philippines laws; and that Level Up is duly registered with the Board of Investments (BOI) as a Non-Pioneer "New IT Service Firm in the Field of an Application Service Provider (ASP)" . It is also represented that a Non-Exclusive Philippines Payment Gateway Marketing and Distributorship Agreement ("Agreement") was made and executed by Cherry and Level Up effective on January 11, 2012 with a term of two (2) years unless earlier terminated or extended; that under the Agreement, Cherry grants Level Up the right, license and authorization to market, promote, distribute and sell the Cherry credits used in the Portal to purchase game time or game currency to end-users in the Philippines, and to use the Licensed Marks in the Philippines pursuant to the terms of the Agreement; that in consideration of the right granted, Level Up shall pay Cherry royalty fee as follows: Level Up! E-Pin/Card Royalty to Cherry Credit Pte. Denomination (Php) Ltd. (SGN) 100.00 2.08 350.00 7.28 500.00 10.40 1,000.00 20.80 That as of April 20, 2012 no royalty payment have been paid to Cherry by Level Up per Certification issued by Level Up on May 3, 2012. It is finally represented per Sworn Statement dated March 12, 2012 issued by Level Up that the 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. In reply, please be informed that royalty payments to a nonresident foreign corporation are, in general, covered by Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended. 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 . . .: 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 reply, please be informed that Article 12 of the Philippines-Singapore tax treaty states that: "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 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. xxx xxx xxx" Based on the foregoing, royalty payments to a resident of Singapore arising in the Philippines may be taxed at the preferential tax rate of 15 percent of the gross amount of the royalties if the royalties are paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines and 10 percent of the gross amount of the royalties in all other case. Hence, since Cherry is a resident of Singapore with no fixed place of business in the Philippines and that, IT, the BOI-registered activity of Level Up , is listed as a preferred area of investment in the Investment Priorities Plan of 2012, this Office is of the opinion as it hereby rules that the royalty income of Cherry from Level up under the subject Agreement is subject to a preferential tax rate of 15 percent of the gross amount thereof pursuant to Article 12 (2) (b) 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). It 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%) 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 (RR) No. 4-2002, Section 3 or RR No. 8-2002, Section 7 of RR No. 14-2002 and Section 4.114-2 of RR No. 16-05, as amended by RR No. 04-07, Level Up shall be responsible for the withholding of VAT on the royalties fee before remitting it to Cherry . In remitting to the Bureau of Internal Revenue the VAT withheld, Level Up shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, Level Up 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, Level Up may include as part of the cost of the royalty fees to it by, Cherry the VAT consequently shifted or passed on to it. In addition Level Up is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Cherry and the fourth copy for Level Up 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.