ITAD BIR Ruling No. 191-11

July 11, 2011 ITAD BIR RULING NO. 191-11 Article 12 Philippines-Switzerland tax treaty; Sections 28 (B) (1) and 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD-042-10; BIR Ruling No. ITAD-071-10; BIR Ruling No. ITAD-005-09 Isla Lipana & Co. 29th Floor Philamlife Building 8767 Paseo de Roxas, Makati City Attention: Ms. Mary Assumption S. Bautista-Villareal Principal, Tax Gentlemen : This refers to your tax treaty relief application dated April 20, 2011, requesting confirmation that the royalties paid by Syngenta Philippines, Inc. ("Syngenta-Phil") to Syngenta Crop Protection AG ("Syngenta AG") under three Agreements namely, Corn Germplasm License Agreement ("CGLA"), Syngenta Brand License Agreement ("SBLA") and Trait License Agreement ("TLA") are subject to the preferential rate of 15 percent 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 Syngenta AG is a nonresident foreign corporation organized and existing under the laws of Switzerland under registration number 7-017011-03 with principal business address at Schwarzwaldallee 215 4058 Basel as evidenced by the Certificate of Residence issued by the Swiss tax authority of the Canton of Basel-Stadt dated October 13, 2010; that Syngenta AG is not registered either as a corporation or as a partnership in the Philippines as confirmed by the Certification of Non-Registration dated March 25, 2011 issued by the Securities and Exchange Commission; that on the other hand, Syngenta-Phil is a domestic corporation having its registered office at 169 H.V. Dela Costa Street, Salcedo Village, 1227 Makati City; and that Syngenta-Phil is engaged in the manufacture, process, export, import, buy, sell, wholesale and dealing of agricultural chemical and drugs, seed products, planting materials and other related goods, products, wares, merchandise and commodities. It is further represented that Syngenta Seeds AG ("Syngenta Seeds") and Syngenta-Phil entered into a CGLA dated April 26, 2004 whereby Syngenta Seeds grants to Syngenta-Phil a non-exclusive, non-transferable, royalty-bearing license to use or utilize any and all of the Proprietary Rights, Proprietary Information and Trademarks in order to produce, promote and commercialize Seed in the Philippines; that for and in consideration of the said license, Syngenta-Phil shall pay Syngenta Seeds 12% of the Net Sales for the Seed commercialized by Syngenta-Phil; that the CGLA shall be effective from January 1, 2003 and shall remain in full force for a period of 3 years; it shall thereafter be renewed for successive one year term unless written notice of termination is given by either party to the other at least 90 days prior to the applicable renewal date; that on June 14, 2004, Syngenta Seeds entered into a Merger Agreement with Syngenta AG, according to which, Syngenta Seeds merged into Syngenta AG by absorption as evidenced by the Notarial Deed issued by Dr. Balthasar Bessenich on March 25, 2011; that pursuant to such merger, Syngenta Seeds ceased to exist under the laws of Switzerland thereby Syngenta AG assumed all the rights and interests Syngenta-Phil had under the said CGLA. IcHEaA It is further represented that on February 20, 2006, Syngenta AG and Syngenta-Phil entered into a SBLA whereby Syngenta AG grants to Syngenta-Phil a royalty-bearing, non-exclusive license to use the Syngenta Brand in accordance with the corporate visual identity and corporate communication strategy and guidelines of the Syngenta group of companies in any territory where the company carries out operations, including but not limited to the use of the Syngenta Brand in Syngenta-Phil's letterheads, business cards, communication materials and any and all promotion and commercialization material for the Products; that for and in consideration of the license, Syngenta-Phil shall pay Syngenta AG a royalty fee of 1.5% of Syngenta-Phil's Net Sales; 1 that the royalty fee shall be reviewed annually by the parties no later than sixty days following the end of each year to assure that it continues to reflect the arm's-length value of the rights granted to Syngenta-Phil under the terms of the SBLA; that any change to the royalty rate needs an appropriate amendment to the SBLA to be executed by the parties; that royalties due to Syngenta AG shall be due and payable by Syngenta-Phil on a calendar quarter basis, payable no later that the 15th day following the end of each calendar quarter of a year; that all royalties due under the SBLA shall be payable in US Dollars, at the central bank exchange rate at the date of payment as the case may be; that the SBLA shall be for a period of three years from January 1, 2005 and shall be renewed from year to year thereafter unless terminated by either party upon the giving of notice ninety days prior to the date of termination. It is further represented that on February 25, 2008, Syngenta AG and Syngenta-Phil entered into a TLA whereby Syngenta AG grants to Syngenta-Phil a non-exclusive, non-transferable, royalty-bearing license, without the right to grant sublicenses to produce, make and have made, import, offer for sale and sell Licensed BT-11 Corn Hybrid Seed and use or utilize any and all of the intellectual property regarding the Licensed BT-11 Corn, Licensed BT-11 Event, Proprietary Information and Trademarks in order to produce, make and have made, import, offer for sale and sell Licensed BT-11 Corn Hybrid Seed within the Philippines; that Syngenta-Phil shall be permitted to have Licensed BT-11 Corn being produced and/or processed by contract growers and/or processors in the Philippines pursuant to appropriate written agreements with such parties, which shall include provisions no less severe than those relevant in the TLA including but not limited to in terms of use of the genetic material, confidentiality and quality standards; that for and in consideration of the license, Syngenta-Phil shall pay Syngenta AG a royalty equal to 5% of the Net Sales for the Licensed BT-11 Corn Hybrid Seed sold by Syngenta-Phil under the TLA; that the payments by Syngenta-Phil to Syngenta AG shall be made in US at the end of November in respect of the budgeted sales of the year considered and shall be payable within 30 days; that the term of the TLA shall be retroactively effective as of July 1, 2005, and shall remain in full force for a period of three (3) years; and that it shall then be renewed for successive one (1) year term thereafter unless written notice of termination is given by either party to the other at least ninety (90) days prior to the applicable renewal date. It is finally represented that the aforesaid royalty fees are not subject of investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by Syngenta-Phil on February 22, 2011. 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, the provisions of the Philippines-Switzerland tax treaty which you invoked may apply to your instant request for relief particularly its Article 12, which provides: ADHCSE "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" Based on the aforementioned paragraph 3, 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 also provides that royalties arising from sources within the Philippines and derived by a resident of Switzerland may be taxed but the tax so charged shall not exceed 15 percent of the gross amount of the royalties. Such being the case, the royalty fees paid by Syngenta-Phil to Syngenta AG for the former's use of the Proprietary Rights, Proprietary Information and Trademarks, Syngenta Brand, and Licensed BT-11 Corn Hybrid Seed of the latter shall be subject to a preferential tax rate not exceeding 15 percent of the gross amount of the royalties effective April 20, 2011. 2 ( BIR Ruling No. ITAD-042-10 dated September 23, 2010; BIR Ruling No. ITAD-071-10 dated August 11, 2010; BIR Ruling No. ITAD-005-09 dated February 12, 2009) Finally, as regards value-added tax (VAT), the royalties for the use or the right to use of the Proprietary Rights, Proprietary Information and Trademarks, Syngenta Brand, and Licensed BT-11 Corn Hybrid Seed to be paid by Syngenta-Phil to Syngenta AG 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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. . . . 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 Syngenta-Phil shall be responsible for the withholding of the VAT on the royalties before remitting them to Syngenta AG. In remitting to the Bureau of Internal Revenue the VAT withheld on the royalties, Syngenta-Phil shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). In addition, Syngenta-Phil is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Syngenta AG and the fourth copy for Syngenta-Phil 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. ScCIaA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Net Sales means the gross invoiced sales for Licensed BT-11 Corn charged to Syngenta-Phil to farmers and/or dealers of Licensed BT-11 Corn seed less cash and trade discounts and returns actually granted to purchasers and sales taxes, excises and other taxes paid on such sales price. Trade Discounts means the difference between a dealer's list price and the price at which the dealer actually sells goods to the trade. 2. Pursuant to the provisions of Revenue Memorandum Order No. 72-2010 entitled, "Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties" .