ITAD BIR Ruling No. 201-11

July 26, 2011 ITAD BIR RULING NO. 201-11 Articles 5 (Permanent Establishment), 7 (Business Profits), 12 (Royalties) and 17 (Artistes and Athletes) Philippines-Netherlands tax treaty Castillo Laman Tan Pantaleon & San Jose The Valero Tower 122 Valero Street, Salcedo Village Makati City 1227 Attention: Atty. Joseph Gregson A. Castillo Atty. Lorybeth R. Baldrias-Serrano Gentlemen : This refers to your tax treaty relief application dated December 20, 2010, on behalf of your client, Cirque Du Soleil Shows, B.V. ("Cirque") , requesting confirmation that service fees to be paid by Hoopla, Inc. ("Hoopla") to Cirque are not subject to income tax in the Philippines pursuant to Article 7, in relation to Article 5, of the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . Facts It is represented that Cirque is a foreign corporation organized and existing under the laws of the Netherlands and is resident thereof based on its Deed of Incorporation and on the Declaration of Residence issued by the Tax Administration of Rivierenland/kantoor Arnhem, the Netherlands; that Cirque has its principal office at Regus Teleport Tower, 6th Floor, Kingfordweg 151, 1043 GR, Amsterdam, the Netherlands; that Cirque is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 5, 2010; and that, on the other hand, Hoopla is a corporation organized and existing under the laws of the Philippines, with principal office at 650 Jesus Extension, Pandacan, Manila, Philippines. It is further represented that on November 12, 2010, Cirque and Hoopla entered into a Performance Services Agreement where Cirque agreed to present the show "Varekai" ("Show") in Manila, Philippines, in June and July 2011; that the Show has a running time of approximately 2 1/2 hours, which includes an intermission of approximately 30 minutes, and consists of the following scenes or acts: Animation Sound Machine Presentation/Charivari Fall of Icarus The Net Lovers 1 Icarian Games Water Meteors Clown Magic Cloud (Lovers 2) Abduction Triple Trapeze Georgian Dance 24 minute intermission ITADaE Opening Fireflies Slippery Surface Clown: Ne Me Quittes Pas Nightmare solo on Crutches Aerial Straps Duo Juggler Clown Passage Light bulb Lanterns Hand balancing on Canes Lovers' Flight Russian Swings Finale Back-up Act Cerceau That there will be 40 confirmed performances ("Guaranteed Performances") of the Show from June 21, 2011 to July 24, 2011, and up to six additional performances ("Additional Performances") in between if requested by Hoopla; that Hoopla will select the site where the Show will be presented ("Site") and will, at its own cost and expense, perform all construction works required on the Site and any other works that may be requested thereon by any governmental authority or under any applicable laws or regulations; that Hoopla will, at its own cost and expense, provide all required utilities on the Site such as running water, sewerage system and telecommunication connections; that Hoopla will provide the Site to Cirque at least 30 days before the opening night of the Show, and that the Site will comply fully with the requirements and specifications thereon by Cirque; that after the last performance of the Show, Hoopla will, at its own cost and expense, carry out all restoration works on the Site as required thereon by any governmental authority or by the owners of the Site; that Cirque will, at its own cost and expense, provide and maintain all infrastructures and equipments installed on the Site which are owned and brought by Cirque; that Hoopla will, at its own cost and expense, provide and maintain all other equipment, machinery, material infrastructure and space used on the Site which are not owned and brought by Cirque; that Cirque will, at its own cost and expense, provide the necessary personnel for the Show including those from CGI Group, Inc. and the latter's affiliates for information technology services required on the Show; that Hoopla will, at its own cost and expense, provide other personnel to the Show as required by Cirque; that in consideration, Hoopla will pay compensation to Cirque amounting to US$160,000.00 ("Compensation") for each Guaranteed Performance and each Additional Performance, exclusive of taxes; that the Compensation covers the fees payable by Hoopla to Cirque for presenting the Show and the fees payable by Cirque to the artists of the Show ("Artists") ; and that Cirque will send invoice for each performance which is payable by Hoopla within 10 days from the payment date indicated in the invoice for Guaranteed Performance and within 24 hours from receipt of the invoice for Additional Performances. It is further represented that Hoopla will sell to the public an assortment of merchandise consisting of Cirque Existing Merchandise, 1 Cirque Reproduced Merchandise 2 and Hoopla Developed Merchandise 3 (collectively, the "Merchandise" ); that in consideration for the assistance provided by Cirque with respect to the creation and manufacturing of Hoopla Developed Merchandise, Hoopla will pay Cirque an additional service fee ("Merchandising Service Fee") , the amount thereof to be determined on a case by case basis but in no event to exceed 15 percent of the cost of manufacturing the Hoopla Developed Merchandise, exclusive of any taxes, and payable within ten days after receipt of the merchandise; that Hoopla will provide the following reports to Cirque: a) Box Office and VIP Reports : Daily and weekly sales reports showing the daily, weekly and cumulative ticket sales. These reports will identify the number of tickets sold by seating category, prices at which tickets were sold, the number of complimentary tickets and the number of VIP packages sold, the number of discounted tickets and the amount of the discount. b) Merchandise Sales Reports : Weekly sales reports showing the weekly and cumulative Merchandise sold during such period and a listing of the remaining Merchandise. c) Food and Beverage Sale Reports : Weekly sales reports showing the weekly and cumulative food and beverage sold during such period and a listing of the remaining food and beverage. That after paying the Compensation and the Merchandising Service Fee to Cirque, Hoopla will retain all other revenues generated from the Show, except for any sponsorship fees received from sponsors or official suppliers secured by Cirque for the Show, which will be for the sole account of Cirque; that there is no promise, representation or warranty of any kind made by Cirque to Hoopla on the success or failure of the Show in the Philippines such as the anticipated revenues to be generated by the sale of tickets for the Show; that all payments to be made to Cirque will be made by wire transfer to a designated account of Cirque which may be in any financial institution in the world. HSDCTA It is further represented that on December 6, 2010, Cirque and Hoopla entered into an Amendment to the Agreement where both parties agreed that: 1. Hoopla shall make and deliver to Cirque a security deposit in the amount of US$1,280,000.00 ("Deposit") , payable as follows: a) US$100,000.00: within 3 days from the signature of the Agreement. b) US$500,000.00: within 13 days from the signature of the Agreement. c) US$680,000.00: within 23 days from the signature of the Agreement. The Deposit shall be applied to the first installment of the Compensation for the Guaranteed Performances. 2. The Compensation for the Guaranteed Performances shall be paid as follows: March 1, 2011 US$2,560,000.00 April 1, 2011 US$1,280,000.00 May 1, 2011 US$1,280,000.00 June 1, 2011, last payment, split as follows: Artists' Fee US$566,266.00 Cirque's Service Fee US$713,734.00 Total US$6,400,000.00 ============= It is finally represented that the income to be received by Cirque subject of the request for ruling is not under 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 the Managing Director of Cirque on November 12, 2010. Ruling A. On Income tax In reply, please be informed that income derived in the Philippines by Cirque, being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 30 percent. Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, provides: "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%)." However, such income may be exempt from income tax or subject to a reduced rate to the extent required by any obligation on the Philippines. Section 32 (B) (5) of the Code provides: THAICD "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: 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." With respect to the portion of the Compensation which represents the Service Fee of Cirque, this is generally treated as business profits . As business profits, the Service Fee may be taxed in the Philippines if attributable to a permanent establishment which Cirque has in the Philippines. Paragraph 1, Article 7 of the Philippines-Netherlands tax treaty provides: "Article 7 BUSINESS PROFITS 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." With regard to a permanent establishment, paragraphs 1 and 2, Article 5 of the treaty provide: "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period." cHATSI Accordingly, since Cirque will present the Show in the Philippines for a period not to exceed an aggregate of 183 days within any twelve-month period (in fact, 34 days only from June 21 to July 24, 2011), the Service Fee to be paid by Hoopla to Cirque is exempt from income tax pursuant to paragraph 1, Article 7, in relation to paragraphs 1 and 2, Article 5, of the Philippines-Netherlands tax treaty. However, with respect to the portion of the Compensation which represents the Artists' Fee , this is subject to income tax in the Philippines regardless of the very short length of stay in the Philippines of the individual performers concerned pursuant to paragraph 1, Article 17 of the Philippines-Netherlands tax treaty, thus: "Article 17 ARTISTES AND ATHLETES 1. Notwithstanding the provisions of Articles 5, 7, 14 and 15 income derived by entertainers, such as theatre, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such, and income derived from the furnishing by an enterprise of the services of such entertainers or athletes, may be taxed in the State in which these activities are performed." The Artists Fee is subject to tax at the rate of 25 percent based on the gross amount of the income under Section 25 (B) of the Tax Code of 1997, as amended, thus: "SEC. 25. Tax on Nonresident Alien individual. xxx xxx xxx (B) Nonresident Alien 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. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24." With respect to the Merchandising Service Fee for the assistance provided by Cirque to Hoopla with respect to the creation and manufacturing of Hoopla Developed Merchandise, since this merchandise incorporates any of Cirque's intellectual property related to the Show (trademarks, service marks, copyrights, logos, designs, etc.), this fee is in the nature of royalties , being essentially payments for the use of, or the right to use, trademark, copyright, and design, under paragraph 4, Article 12 of the Philippines-Netherlands tax treaty, thus: "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 including cinematograph films or tapes for radio or television broadcasting, 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." DAcSIC The Merchandising Service Fee is subject to income tax in the Philippines at the rate of 15 percent of the gross amount thereof pursuant to paragraph 2 (b), Article 12 of the treaty, thus: "Article 12 ROYALTIES 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2." Concerning the procedures on the collection and payment of income tax on the Artists Fee and the Merchandising Service Fee, Hoopla, as withholding agent, shall withhold a final income tax at the rate of 25 percent for the Artists Fee and 15 percent for the Merchandising Service Fee . Section 2.57.1 (C) and (I) (1) of Revenue Regulations No. 2-98, 4 as amended, provides: "SECTION 2.57.1. Income Payments Subject to Final Withholding Tax. The following forms of income shall be subject to final withholding tax at the rates herein specified; xxx xxx xxx (C) Income Derived from All Sources Within the Philippines by a Non-resident Alien Individual Not Engaged in Trade or Business Within the Philippines. The following forms of income derived from all sources within the Philippines shall be subject to a final withholding tax in the hands of a non-resident alien individual not engaged in trade or business within the Philippines based on the following amounts and at the rates prescribed therefor: (1) On the gross amount of income derived from all sources within the Philippines by a non-resident alien individual who is not engaged in trade or business in 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 Twenty five percent (25%). xxx xxx xxx (I) Income Derived from all Sources Within the Philippines by Non-Resident Foreign Corporation. The following shall be subject to final withholding tax based on the gross amount of income and at the rate of tax prescribed therefor: (1) In general On gross income derived 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 realized from sale, exchange, disposition of shares of stock in any domestic corporation which is subject to capital gains tax under Sec. 28(B)(5)(c) at the following rates: EADSIa 34% beginning January 1, 1998 33% beginning January 1, 1999 and 32% beginning January 1, 2000 and thereafter" 5 (As reduced to 15 percent under Article 12 of the Philippines-Netherlands tax treaty.) Moreover, Hoopla shall file BIR Form 1601-F (Monthly Remittance Return of Final Income Taxes Withheld) in triplicate at an authorized agent bank located within the Revenue District Office having jurisdiction over its residence or principal place of business and shall pay to that bank the income tax withheld on the Artists Fee and the Merchandising Service Fee. The filing and payment shall be made on or before the 10th day of the month following the month in which the withholding was made. Hoopla shall issue BIR Form 2306 (Certificate of Final Income Taxes Withheld to Cirque on or before January 31 of the succeeding year. Section 2.58 (A) (1) and (2) and (B) of the same Regulations provides: "SECTION 2.58. Returns and Payment of Taxes Withheld at Source. (A) Monthly return and payment of taxes withheld at source (1) WHERE TO FILE Creditable and final withholding taxes deducted and withheld by the withholding agent shall be paid upon filing a return in duplicate with the authorized agent banks located within the Revenue District Office (RDO) having jurisdiction over the residence or principal place of business of the withholding agent. In places where there is no authorized agent banks, the return shall be filed directly with the Revenue District Officer, Collection Officer or the duly authorized Treasurer of the city or municipality where the withholding agent's residence or principal place of business is located, or where the withholding agent is a corporation, where the principal office is located except in cases where the Commissioner otherwise permits. (2) WHEN TO FILE (a) The withholding tax return, whether creditable or final, shall be filed and payments should be made within ten (10) days after the end of each month except for taxes withheld for December which shall be filed on or before January 25 of the following year. xxx xxx xxx (B) Withholding tax statement for taxes withheld Every payor required to deduct and withhold taxes under these regulations shall furnish each payee, whether individual or corporate, with a withholding tax statement, using the prescribed form (BIR Form 2307) showing the income payments made and the amount of taxes withheld therefrom, for every month of the quarter within twenty (20) days following the close of the taxable quarter employed by the payee in filing his/its quarterly income tax return. Upon request of the payee, however, the payor must furnish such statement to the payee simultaneously with the income payment. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year." B. On value-added tax Finally, concerning the Compensation and the Merchandising Fee to be paid by Hoopla to Cirque under the Agreement, these payments for the sale of services and the use of an intangible property in the Philippines, are subject to value-added tax ("VAT") pursuant to Section 108 (A) of the Tax Code of 1997, as amended, thus: "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: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 6 raise the rate of value-added tax to twelve percent (12%). . ." cHAaCE Concerning the procedures on the collection and payment of VAT, Hoopla, as resident withholding agent, shall withhold VAT at the rate of 12 percent on the Compensation, the Merchandising Fee, and other related payments to Cirque, the nonresident supplier of services and lessor or licensor of the subject intangible property. Hoopla shall use BIR Form No. 1600 (Remittance Return of VAT and Other Percentage Taxes Withheld). The passed-on VAT may be claimed by Hoopla as input tax when filing its own VAT return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales, and exempt sales. Otherwise, such passed-on VAT shall form part of the cost of the supply of services and the use of the intangible property which may be treated by Hoopla as an expense or asset , whichever is applicable. The filing and payment shall be made on or before the 10th day of the month following the month in which the withholding was made. Section 4.112-2 of Revenue Regulations No. 16-2005, 7 as amended by Revenue Regulations No. 4-2007, 8 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 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. aATCDI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Cirque Existing Merchandise consists of merchandise developed by Cirque and any merchandise purchased from third parties authorized by Cirque, for resale in accordance with the Agreement, such as audio-visual products like CDs, DVDs and videos. 2. Cirque Reproduced Merchandise means Cirque Existing Merchandise reproduced by Hoopla. 3. Hoopla Developed Merchandise means merchandise other than Cirque Existing Merchandise and Cirque Reproduced Merchandise that is created, developed and produced by Hoopla and which incorporates any of Cirques' intellectual property related to the Show, as provided by Cirque to Hoopla. 4. Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to the Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Creditable Value-Added Tax and Other Percentage Taxes. 5. 30% beginning January 1, 2009, and thereafter, pursuant to Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, * 236, 237 and 288 of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes) . 6. 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. 7. Consolidated Value-Added Tax Regulations of 2005. 8. Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005).