ITAD BIR Ruling No. 209-13

July 19, 2013 ITAD BIR RULING NO. 209-13 Philippines-Italy Tax Treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. Reynante M. Marcelo Partner, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application filed on March 20, 2012, on behalf of Perfetti Van Melle S.p.A. ("PVMS") , requesting confirmation that the royalty payments of Perfetti Van Melle Phils., Inc. ("PVMPI") to PVMS are subject to 10 percent final withholding tax pursuant to Article 13 of the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and to Prevent Fiscal Evasion ("Philippines-Italy tax treaty") . AaCcST It is represented that PVMS, with office address at Lainate, Via XXV Aprile 7, Milano, Italy, is a resident of Italy for purposes of Italian taxation per the Tax Residence Certificate issued by the Provincial Director of Orazio Andra Passamonte dated April 10, 2011; that PVMS-SPA is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission dated May 30, 2011; that PVMPI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with principal office at 11th Floor One Global Place, 5th Avenue corner 25th Street Bonifacio, Global City, Taguig City. It is further represented that on January 1, 2010, a Trademarks and Know-how License Agreement ("Agreement") was entered into by and between PVMS and PVMPI, whereby PVMS has been granted a license to sell various kinds of confectionery candies, chewing gums, bubble gums, jelly candies, lollipops, lozenges and other innovative confectionery products and license to use its technological, technical marketing and commercial know-how in sales, advertisement and promotion of the Products; that the Agreement will continue in force for five years from the date of signature of PVMS and will be automatically be renewed for same periods unless it is terminated by one of the party by written notice; that PVMPI shall pay to PVMS a royalty fee based on the net sales of the following: Global Brands Royalty Percentage Chupa Chups 2.5% Regional Brands Royalty Percentage Alpenliebe 2.0% Smint Big Babol Local Brands Royalty Percentage Chlormint 1.5% Van Melle Furthermore, it is represented per sworn Certification issued by PVMPI that on December 14, 2012, PVMPI remitted royalty payments to PVMS for the period of January 1 to December 31, 2011. It is finally represented that the issue/transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved as evidenced by Sworn Statement issued by PVMPI on March 15, 2010. In reply, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") , which covers income derived or which accrued on November 4, 2010 and thereafter, 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 before the first taxable event subject of the TTRA, to wit: EScHDA " SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis ours) In view of the foregoing, since the Agreement that gives rise to the royalties has been in effect on January 1, 2010 , but the TTRA for this purpose was filed only on March 20, 2012 , this Office hereby DENIES relief on all royalties paid by PVMS to PVMPI on and before March 20, 2012 , pursuant to Section 14 of RMO 72-2010 and Section III (2) of RMO 1-2000. Accordingly, said fees shall be subject to income tax at the rate of 30 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, 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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." On the other hand, the royalties paid to PVMS on March 21, 2012 and thereafter are subject to a reduced rate of income tax under Article 12 of the Philippines-Italy tax treaty, which provides: CacTSI "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 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 all other cases, 25 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 cinematograph films, or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Based on the aforequoted provisions the tax imposed on royalties derived by a resident of Italy like PVMS from sources within the Philippines may be taxed in the Philippines at a rate not exceeding 15 percent of the gross amount of the royalties if the royalties are paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; and 25 percent in all other cases. cTEICD Accordingly, since PVMPI, the payor of the royalties, is not a registered enterprise and engaged in preferred areas of activities in the Philippines, the royalties paid by it to PVMS on March 21, 2012 and thereafter, being essentially royalties for the use of know-how and trademark, shall be subject to income tax at the rate of 25 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Italy tax treaty. Moreover, as provided in Section 108 of the Tax Code of 1997, the said royalty payments are subject to value-added tax (VAT). It 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%) 1 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" With regard to the procedures for the withholding and the payment of the VAT, pursuant to Sections 4 and 6 of Revenue Regulations (RR) No. 4-2002, Section 3 or RR No. 8-2002, Section 7 of RR No. 14-2002 and Section 4.114-2 of RR No. 16-05, as amended by RR No. 04-07 PVMPI shall be responsible for the withholding of VAT on the royalties fee before remitting it to PVMS. In remitting to the Bureau of Internal Revenue the VAT withheld, PVMPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, PVMPI may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying such form. On the other hand, if it is a non VAT-registered taxpayer, PVMPI may include as part of the cost of the royalty fees to it by, PVMS the VAT consequently shifted or passed on to it. In addition PVMPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for, PVMS and the fourth copy for PVMPI 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. caHCSD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12% 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.