ITAD BIR Ruling No. 184-11

June 29, 2011 ITAD BIR RULING NO. 184-11 Article 12, Philippines-Indonesia tax treaty; Sections 25 (B), 32 (B) (5), 105, and 108 (A) of the National Internal Revenue Code of 1997, as amended; Revenue Regulations No. 16-2005; BIR Ruling No. ITAD 163-00 Kino Consumer Philippines, Inc. 3rd Floor, La Fuerza Plaza 2241 Don Chino Roces Avenue Makati City Attention: Mr. Julius Temadja Finance Controller Gentlemen : This refers to your application for tax treaty relief which we received on December 21, 2010, requesting confirmation that royalties to be paid by Kino Consumer Philippines, Inc. ("KCPI") to Mr. Harry Sanusi are subject to a preferential rate of 25 percent based on the gross amount of the royalties pursuant to Article 12 (2) (a) (ii) of the Agreement Between the Government of the Republic of the Philippines and the Government of the Republic of Indonesia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Indonesia tax treaty") . Basic Facts: It is represented that Mr. Sanusi is a resident of Indonesia based on the Certificate issued by the Kelapa Gading Tax Office of the Directorate General of Tax in Indonesia on October 25, 2010; that his principal address is at Jl. Kuta Raya No. 11 Rt. 017 Rw. 007, Kelapa Gading, Kelapa Gading Barat, Jakarta Utara, Indonesia; that Mr. Sanusi does not own or operate any business in the Philippines based on the Negative Certification issued by the Department of Trade and Industry on August 12, 2010; and that, on the other hand, KCPI is a domestic corporation with office address at 3rd Floor, La Fuerza Plaza, 2241 Don Chino Roces Avenue, Makati City, Philippines. It is also represented that on October 29, 2010, Mr. Sanusi and KCPI entered into a Trademark License Agreement where Mr. Sanusi granted KCPI a non-exclusive license to use the Trademark for the following list of brands: 1. B & B Kids 2. Ellips 3. Eskulin 4. Intense 5. Master 6. Samantha 7. Sasha That Mr. Sanusi likewise granted KCPI an exclusive, non-transferable, and royalty-free license to use the following Trademark and the Knowhow in relation to the manufacture, marketing, promotion, sale and distribution of the Manufactured Products and the Products in the Philippines: 1. B & B Kids (shampoo and conditioner, powder, cologne, and toothpaste, in different variants) 2. Ellips (cologne, serenity, hair treatment, and ultra treatment, in different variants) 3. Eskulin TSacAE a) Disney Princess (cologne, shampoo, and powder, in different variants) b) Disney Kids (cologne, hand sanitizer, shampoo and conditioner, in different variants) 4. Intense (cologne in different variants) 5. Master (cologne, powder, shower gel, shampoo and conditioner, toothpaste, and styling gel, in different variants) 6. Samantha (lotion) 7. Sasha (hair colorant in different variants) That Trademark means the brands and trademarks as described above; that Knowhow means any data and information provided by Mr. Sanusi to KCPI necessary to manufacture the Manufactured Products; that Manufactured Products means all products manufactured in the Philippines under the license of Mr. Sanusi; that Products means all products of the Kino Group of Companies (except those of PT. Kino Sentra Industrindo ) sold under the registered Trademarks; that no right, title or interest of any kind in or to the Trademark and the Knowhow licensed under the Agreement, or the registration thereof, is transferred by the Agreement to KCPI, except the license given to KCPI as stipulated in the Agreement; that neither the Agreement nor any right or license granted thereunder shall be assigned by KCPI and that KCPI shall not have the right to grant any sub-licenses of the Trademark and the Knowhow thereunder, except with the prior written consent of Mr. Sanusi; and that continued access to improvements in techniques and process related to the Knowhow shall be made available to KCPI during the period of the Agreement. It is further represented that for and in consideration of the license granted, KCPI agrees to pay to Mr. Sanusi the following: a) For the usage of the non-exclusive license to use the Trademark for the list of brands as described above, a license fee in the amount of US$0,00; * and b) For the usage of the exclusive, non-transferable and royalty-free license to use the Trademark and the Knowhow in relation to the Products and the Manufactured Products as described above, a license fee in the amount of one percent (1%) of the Net Sales of the Products and the Manufactured Products. Net Sales means the purchase price of the Products and the Manufactured Products sold by KCPI to its main distributors in the Philippines. The price shall include any discounts provided by KCPI but exclude any tax that may be imposed thereon in the Philippines on the sale of the Products and the Manufactured Products. That the license fee shall be paid within ninety (90) days from the end of the year and shall be made in Philippine pesos or in another currency at the prevailing exchange rate at the time of payment; and that the Agreement shall continue to be in force and effect for a period of five (5) years from the date of its signing, and may be extended for another five (5) years, unless terminated earlier. It is further represented that the following Trademarks are owned by Mr. Sanusi and registered with the Intellectual Property Office of the Philippines: 1. B & B (Certificate of Registration No. 4-2003-002950 dated January 12, 2006) 2. Ellips and Device (Certificate of Registration No. 4-2003-002952 dated January 12, 2006) 3. Ovale and Device (Ovale with an Ornament for Aesthetic Purposes) (Certificate of Registration No. 4-1999-008649 dated May 30, 2003) 4. Intense by Master and Device (Certificate of Registration No. 4-2004-003250 dated April 7, 2008) 5. Eskulin and Device (Certificate of Registration No. 4-2001-001367 dated April 16, 2004) 6. Master and Device (Certificate of Registration No. 4-2002-000929 dated January 17, 2005) It is finally represented based on the Sworn Statement issued by the Finance Controller of KCPI on December 14, 2010, that the royalties subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. HTAEIS Ruling A. On income tax In reply, please be informed that the license fees to be paid to Mr. Sanusi, being a non-resident alien individual not engaged in trade or business in the Philippines, are subject to income tax at the rate of 25 percent of the gross amount thereof, pursuant to Section 25 (B) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, thus: "Section 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. . . ." (emphasis supplied) However, such income may be exempt or partially exempt (if subject to a reduced rate only) if the same is so exempt or partially exempt to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the same Code provides: "SEC. 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what you invoke for this purpose is the Philippines-Indonesia tax treaty. Article 12 thereof provides as follows: "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, if such resident is the beneficial owner of the royalties. 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State. However, the tax so charged shall not exceed: a) in the case of the Philippines: (i) 15 percent 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 as determined by the said Board; and (ii) in all other cases, 25 percent of the gross amount of the royalties ; b) in the case of Indonesia: 15 percent of the gross amount of the royalties. 3. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of the limitations provided in the preceding paragraph. 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, any patent, trademark , 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television or tapes for the use of radio broadcasting." (emphasis supplied) Under paragraph 2, Article 12 of the Philippines-Indonesia tax treaty, royalties arising in the Philippines and paid to a resident of Indonesia may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (i) 15 percent of the gross amount of the royalties if the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities (as determined by the Board) and (ii) 25 percent of the gross amount of the royalties in all other cases. cHCSDa This being the case, and since KCPI, the company paying the royalties is not registered with the Board of Investments, the license fees to be paid by KCPI to Mr. Sanusi under the Agreement, beginning December 1, 2010 , 1 being essentially royalties for the use of, or the right to use, a trademark and information concerning industrial, commercial or scientific experience ("know-how") , are subject to income tax at the rate of 25 percent based on the gross amount thereof, pursuant to paragraph 2 (a) (ii), Article 12 of the Philippines-Indonesia tax treaty. (BIR Ruling No. ITAD 163-00 dated October 30, 2000) . B. On value-added tax In addition to income tax, the license fees for the use of the Trademark and the Knowhow, being payments for the use or lease of (intangible) properties in the Philippines, are subject to value-added tax (VAT). Section 108 (A) of the Tax Code of 1997, as amended, 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%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 2 raise the rate of value-added tax to twelve percent (12%) . . . 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 (3) The supply of scientific, technical, industrial or commercial knowledge or information:" (emphasis added) While VAT is generally imposed on any person who sells, barters, exchanges, leases goods or properties, and renders services, in the course of his or its trade or business, Section 105 of the Code provides that services rendered by a nonresident foreign person in the Philippines shall be considered to be rendered by that person in the course of trade or business. It provides: "SEC. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716. The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. AcDaEH The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business." Moreover, as to the withholding of VAT on payments made to non-resident persons, Section 4.114-2 of Revenue Regulations No. 16-2005, as amended by Revenue Regulations No. 4-2007, provides that KCPI, the resident withholding agent, shall withhold VAT of 12 percent on the license fees payable to Mr. Sanusi, the nonresident lessor or licensor of the intangible properties, thus: Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and, (2) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'expense' or 'asset', whichever is applicable, of the resident withholding agent." VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made." 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. Revenue Memorandum Order No. 72-2010 entitled, "Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties" , effective November 4, 2010. 2. 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.