ITAD BIR Ruling No. 186-12

May 3, 2012 ITAD BIR RULING NO. 186-12 Articles 12 (Royalties) Philippines-Singapore tax treaty Nagase Philippines International Services Corporation 18-B, Trafalgar Plaza H.V. dela Costa Street Salcedo Village, Makati City Attention: Mr. Shoji Fujii President Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on January 18, 2008 requesting confirmation that royalties paid by Nagase Philippines International Services Corporation ("Nagase Philippines") to Nagase Singapore Pte. Ltd. ("Nagase") are subject to income tax at the rate of 25 percent pursuant to the 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") . Facts Nagase is a corporation organized and existing under the laws of Singapore and is a resident thereof based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore on December 22, 2007. Nagase is situated at 300 Beach Road, 39-00 The Concourse, Singapore. Based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission ("SEC") on January 14, 2008, Nagase was previously licensed by the SEC to establish a representative office in the Philippines under the name 'Nagase Singapore Pte. Ltd. Manila Representative Office' and under SEC Registration No. AF095-117, which license was cancelled already by the SEC on February 3, 1999. On the other hand, Nagase Philippines is a domestic corporation situated at 18-B, Trafalgar Plaza, H.V. dela Costa Street, Salcedo Village Makati City (main office),and at Building 3, 123-125 Technology Avenue, Phase IV, LTI, Bian, Laguna, Philippines (Laguna office),in the Philippines. HITEaS On January 1, 2007, Nagase and Nagase Philippines entered into an Enduser License Agreement (Agreement No. NAS2007002) where Nagase granted Nagase Philippines a limited, non-sublicensable, non-exclusive, and nontransferable right to use one copy of the specified version of the Software and its accompanying documentation. The license allows multi-user or networked licensed terms whereby Nagase Philippines may use the Software on a device within a multi-user or networked environment for connecting directly or indirectly. Nagase Philippines may not rent, lease, sublicense, loan or resell the Software. Nagase Philippines may only use the Software on a hardware that is under its exclusive control. In consideration, Nagase Philippines will pay license fees to Nagase. The Agreement took effect on January 1, 2007, and will continue to be in effect indefinitely unless terminated by either party. Based on the Affidavit issued by the President of Nagase Philippines on April 23, 2008, the Software referred to in the Agreement is a financial software developed by Nagase and is currently used by Nagase Philippines to computerize its accounting, inventory and warehousing management operations. The license fees payable to Nagase are in consideration for Nagase Philippines' use of the Software, for the provision of technical know-how by Nagase to Nagase Philippines on the enhancement and development of the Software, for trainings provided by Nagase to Nagase Philippines' employees to utilize the Software and other matters relating to information technology for the efficient worldwide business operations of Nagase Philippines. Based on the Applications for Foreign Remittance made by Nagase Philippines at Bank of Tokyo-Mitsubishi UFJ Manila Branch and on the Foreign/domestic Telegraphic Transfer Application Form made by Nagase Philippines at Banco de Oro, Nagase Philippines remitted payments to Nagase as follows: Date Amount (in US Dollars) Receiving Bank 07/30/2008 37,686.53 09/30/2008 37,165.82 01/13/2009 72,395.64 06/15/2009 26,057.02 07/28/2009 27,070.36 10/27/2009 34,985.40 01/29/2010 45,006.00 Bank of Tokyo- 04/26/2010 33,126.55 Mitsubishi UFJ 09/29/2010 60,803.75 Singapore Branch 11/02/2010 21,438.75 02/04/2011 17,991.25 05/20/2011 74,982.66 08/31/2011 202,195.62 11/29/2011 10,805.75 01/27/2012 16,437.50 03/02/2012 3,591.18 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) 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, to wit: aECTcA "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 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 . 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 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 subject TTRA was filed on January 18, 2008, and the Agreement that gives rise to the payment of fees took effect on January 1, 2007, this Office hereby DENIES relief on fees paid by Nagase Philippines to Nagase on and before the fifteenth day of filing of the TTRA on February 2, 2008, pursuant to Section III (2) of RMO 1-2000. Accordingly, said fees shall be subject to income tax at the rate provided under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, to wit: EHACcT "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 license fees paid to Nagase on February 3, 2008 and thereafter are subject to relief under paragraphs 1, 2 and 3, Article 12 of the Philippines-Singapore tax treaty, to wit: "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. DAaHET 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 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." Under Article 12, royalties arising in the Philippines and paid to a resident of Singapore are subject to income tax in the Philippines at a rate not to exceed (a) 15 percent if the royalties are paid by an enterprise registered with the Board of Investments and engaged in preferred areas of activities, or if the royalties are paid in respect of cinematographic films or tapes for television or broadcasting; and (b) 25 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 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 ("know-how") . Accordingly, since the fees payable under the Agreement are, among others, for the provision of technical know-how on the enhancement and development of software, being essentially royalties for the use of know-how, such fees paid by Nagase Philippines to Nagase on February 3, 2008 and thereafter shall be subject to income tax at the rate of 25 percent, pursuant to paragraph 2 (c), Article 12 of the Philippines-Singapore tax treaty. The fees cannot be subject to the lower rate of 15 percent under paragraph 2 (a) of the same article since Nagase Philippines is not registered with the Board of Investments as such, and since the fees are not paid in respect of the use of cinematographic films or tapes for television or broadcasting. Finally, under Section 108 (A) of the Tax Code, the royalties, being payments for the use of intangible property (know-how) 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 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, 1 raise the rate of value-added tax to twelve percent (12%) ..." TcDAHS Accordingly, Nagase Philippines shall withhold VAT on the royalties at the rate of 12 percent before remitting them to Nagase. Nagase Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).If it is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for Nagase Philippines' claim of input tax on the royalties. Otherwise, Nagase Philippines may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within 10 days following the end of the month the withholding was made. 2 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 percent 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. 2. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) ,which provides: "SEC. 4.114-2. 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 corporations, individuals, estates and trusts, 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) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) 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 'asset' or 'expense',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."