ITAD BIR Ruling No. 203-14

October 3, 2014 ITAD BIR RULING NO. 203-14 Article 12 (Royalties) Philippines-France tax treaty, as amended Baniqued and Baniqued Attorneys at Law 8th Floor, Jollibee Centre San Miguel Avenue Pasig City Attention: Atty. Emma Malou U. Lim Gentlemen : This refers to your tax treaty relief application filed on December 28, 2011 requesting confirmation that royalties paid to Lafarge SA ("Lafarge") by Republic Cement Corporation ("Republic Cement"), Mindanao Portland Cement Corporation ("Mindanao Cement") and Iligan Cement Corporation ("Iligan Cement") are subject to income tax at the rate of 15 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ("Philippines-France tax treaty") . 1 Facts Lafarge is a foreign corporation and a resident of France based on its Articles of Association and Certificate of Residence issued by the Direction Gnrale des Finances Publiques of France on December 22, 2011. Lafarge is located at 61, Rue des Belles-Feuilles, Paris, France. Lafarge 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 January 22, 2012. On the other hand, Republic Cement, Mindanao Cement and Iligan Cement are domestic corporations all located at 25th Floor, Salcedo Tower, 169 H.V. dela Costa Street, Salcedo Village, Makati City, Philippines. CIAHaT Agreements with Republic Cement On January 1, 2012, Republic Cement and Lafarge entered into an Intellectual Property License Agreement where Lafarge granted Republic Cement a non-exclusive, royalty-bearing right to use intangible properties for the manufacture, use and application of regular and special cements, cement additives, and any other hydraulic binding materials. These properties are know-how, patents, and, if any, some registered product brands to accompany the sale of the products. Know-how refers to (1) industrial standards; tools and data; procedures, methodologies, policies, among others, which can be accessed through Lafarge L.O Cement Portal, and (a) technical software used in cement plant. Patents refer to the patent "Dreamclay Cementitious" (application for registration on October 8, 2009 and pending registration to date). With respect to Product Brands, there is no application for the registration of any brand to date. In consideration, Republic Cement will pay Lafarge an annual license fee (royalty) equivalent to 2.5 percent of Republic Cement's consolidated net turnover, which is the total turnover of all products sold (domestic and export) on a stand-alone basis after deducting turnover from other business activities, external purchased clinker for production, cost of purchased products for sale (cement), and cost of freight to customers. The fee will be made in euros and computed quarterly and paid on the date indicated in the invoice to be issued by Lafarge to Republic Cement. The Agreement took effect on January 1, 2012 for initial term of one year; thereafter, the Agreement will be tacitly renewed for additional successive periods of one year. On January 1, 2012, Republic Cement and Lafarge entered into a Master Brand Agreement where Lafarge granted Republic Cement a limited, non-exclusive, non-sub licensable, royalty-bearing right to use trademarks for the manufacture and sale of construction materials. These trademarks are the logo "Lafarge" (under Registration No. 4-1999-005048 issued on August 17, 2006) and the baseline "Bringing Materials to Life" (application for registration on April 19, 2010 and pending registration to date). In consideration, Republic Cement will pay Lafarge an annual license fee (royalty) equivalent to 1.5 percent of Republic Cement 's consolidated net turnover, which is the total turnover of all products sold (domestic and export) to third parties after deducting turnover from other business activities and cost of freight to customers. The fee will be made in euros and computed quarterly and paid on the date indicated in the invoice to be issued by Lafarge to Republic Cement . The Agreement took effect on January 1, 2012 for an initial term of one year; thereafter, the Agreement will be tacitly renewed for additional successive periods of one year. CTEaDc Agreement with Mindanao Cement On January 1, 2012 , Mindanao Cement and Lafarge entered into a Master Brand Agreement where Lafarge granted Mindanao Cement a limited, non-exclusive, non-sub licensable, royalty-bearing right to use trademarks for the manufacture and sale of construction materials. These trademarks are the logo "Lafarge" (under Registration No. 4-1999-005048 issued on August 17, 2006) and the baseline "Bringing Materials to Life" (application for registration on April 19, 2010 and pending registration to date). In consideration, Mindanao Cement will pay Lafarge an annual license fee (royalty) equivalent to 1.5 percent of Mindanao Cement 's consolidated net turnover, which is the total turnover of all products sold (domestic and export) to third parties after deducting turnover from other business activities and cost of freight to customers. The fee will be made in euros and computed quarterly and paid on the date indicated in the invoice to be issued by Lafarge to Mindanao Cement. The Agreement took effect on January 1, 2012 for an initial term of one year; thereafter, the Agreement will be tacitly renewed for additional successive periods of one year. Agreement with Iligan Cement On January 1, 2012, Iligan Cement and Lafarge entered into an Intellectual Property License Agreement where Lafarge granted Iligan Cement a non-exclusive, royalty-bearing right to use intangible properties for the manufacture, use and application of regular and special cements, cement additives, and any other hydraulic binding materials. These properties are know-how, patents, and, if any, some registered product brands to accompany the sale of the products. Know-how refers to (1) industrial standards; tools and data; procedures, methodologies, policies, among others, which can be accessed through Lafarge L.O Cement Portal, and (a) technical software used in cement plant. Patents refer to the patent "Dreamclay Cementitious" (application for registration on October 8, 2009 and pending registration to date). With respect to Product Brands, there is no application for the registration of any brand to date. In consideration, Iligan Cement will pay Lafarge an annual license fee (royalty) equivalent to 2 percent of Iligan Cement 's consolidated net turnover, which is the total turnover of all products sold (domestic and export) on a stand-alone basis after deducting turnover from other business activities, external purchased clinker for production, cost of purchased products for sale (cement), and cost of freight to customers. The fee will be made in euros and computed quarterly and paid on the date indicated in the invoice to be issued by Lafarge to Iligan Cement. The Agreement took effect on January 1, 2012 and has an initial term of one year or up to December 31, 2012; thereafter, the Agreement will be tacitly renewed for additional successive periods of one year. Ruling In reply, please be informed that under Section 28(B)(1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, income payments including royalties made to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such income is exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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. " EDcIAC In this regard, paragraphs 1 and 2, Article 12 of the amended Philippines-France tax treaty provides relief to royalties arising in the Philippines and paid to a resident of France, 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 laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 15 percent 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 works recorded for broadcasting or television, 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, such royalties may be taxed in the Philippines at a rate not to exceed 15 percent. 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 and works recorded for broadcasting or television, 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. IcHTAa Accordingly, royalties paid to Lafarge by Republic Cement, Mindanao Cement and Iligan Cement under the Intellectual Property License Agreement and Master Brand Agreement for the use of know-how, patents, and trademarks in the manufacture, use, application, and sale of cements, cement additives, other hydraulic binding materials, and other construction materials, are subject to income tax at the rate of 15 percent, pursuant to paragraph 2, Article 12 of the amended Philippines-France tax treaty. Furthermore, under Section 108 (A) of the Tax Code, the said royalties for the use of certain intangible properties 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, 2 raise the rate of value-added tax to twelve percent (12%). . ." Relative thereto, Republic Cement, Mindanao Cement and Iligan Cement shall each withhold VAT on the royalties at the rate of 12 percent before remitting them to Lafarge . The domestic corporations shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and its accompanying proof of payment shall serve as documentary substantiation for the claim of input VAT by the domestic corporations on the royalties; otherwise, if they are not VAT-registered taxpayers, the passed-on VAT shall form part of the cost of the leased intangible properties which may be treated as an "asset" or "expense", whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 3 CAIHTE 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. As amended by the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998. 2. The VAT rate is increased to twelve 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. 3. Pursuant to Section 4.114-2 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 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 xxx xxx xxx 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." n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.