ITAD BIR Ruling No. 211-12

May 28, 2012 ITAD BIR RULING NO. 211-12 Article 12 (Royalties), Philippines-Germany tax treaty Riego de Dios Law Offices 28th Floor, Tower 2 The Enterprise Center 6766 Ayala Avenue corner Paseo de Roxas Makati City Attention: Maria Rachel V. Riego de Dios Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 2, 2011 requesting confirmation that royalties to be paid by Linde Philippines, Inc. ("Linde Philippines") to Linde AG ("Linde") are subject to 10 percent preferential tax rate pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . It is represented that Linde is a foreign corporation organized and existing under the laws of Germany and is a resident thereof based on the Certificate of Residence issued by the German Tax Administration dated August 11, 2011; that it is not registered either as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC) dated December 16, 2010; and that, on the other hand, Linde Philippines is a corporation duly organized and existing under laws of the Philippines with office address at 30th Floor, Wynsum Corporate Plaza, 22 Emerald Avenue, Ortigas Center, Philippines. HTCSDE It is further represented that on April 13, 2011, Linde and Linde Philippines entered into a License Agreement ("Agreement") whereby the former granted the latter a non-exclusive, non-transferable license to use the Know-How ; the Patent Rights, and the Trademarks of the former without the right to grant sublicenses; that Know-How means the valuable secret know-how including but not limited to drawings, data, reports, specifications of the Agreement Products 1 as well as of the raw (intermediate) and auxiliary materials, by-products, packing materials, testing instructions, physical/chemical and technical application data, manuals, know-how and other business, marketing, economic and/or other information of any kind, processes, formulae, inventions, techniques and information developed or acquired or otherwise known to the Licensor; that Patent Rights means all patent applications and patents in the Territory 2 and all applications for registered designs and registered designs in the Territory; that Trademarks means all trademark applications and trademarks in the Territory listed in the Agreement; that in consideration of the license granted by Linde to Linde Philippines, the latter agreed to pay the former a royalty fee based on the Net Sales Value 3 (NSV) of the Agreement as follows: For Industrial Products - 2.5 percent of NSV For Medical Gas Products - 3.5 percent of NSV that this Agreement shall take effect on January 1, 2011 and shall be valid until terminated by either Linde or Linde Philippines; and that the Agreement is registered with the Philippine Intellectual Property Office ("IPO") per Certificate of Registration No. 5-2010-00112 valid from January 1, 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. cSATDC (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, Article 12 of the Philippines-Germany tax treaty provides: "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 the tax so charged shall not exceed: a) 15 per cent of the gross amount of royalties arising from 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, or EICDSA b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. xxx xxx xxx" Under paragraph 2 (b) Article 12 of the Philippine-Germany tax treaty, payments received as a consideration for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience are considered royalties and shall be taxed at 10 percent provided that the contract giving rise to the said royalties has been approved by the Philippine competent authority. Relative thereto, however, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010, published in the Manila Bulletin on October 20, 2010, and effective November 4, 2010, provides, as follows: "Section 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 of 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 Supplied) aEAIDH In view thereof, since the TTRA was filed only on September 2, 2011, after the date of effectivity of the Agreement on January 1, 2011, this Office hereby DENIES relief on all payments under the Agreement made before the filing of the TTRA on September 2, 2011 in violation of the requirement under RMO 72-2010 that filing of the TTRA should be made BEFORE the transaction, that is the payment of royalties. Accordingly, said payments shall be subject to tax at the rate provided for in Section 28 of the above-cited Tax Code of 1997, as amended. However, relief is hereby GRANTED to all payments made after the filing of the TTRA on September 2, 2011. Hence, such royalties to be paid by Linde Philippines to Linde under the License Agreement, being essentially royalties for the use or the right to use the know-how, the trademark, and the patent of Linde and the Agreement covering the same having been registered with the IPO in compliance with the requirement specified in the Philippine-Germany tax treaty, are subject to the income tax at the preferential rate of 10 percent of the gross amount thereof, pursuant to the same tax treaty. Finally, as regards value-added tax (VAT), the royalties for the use Trade Mark to be paid by Linde Philippines to Linde 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 ten percent (10%) 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; DEICaA xxx xxx xxx" With regard to the procedures for the withholding and 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 Linde Philippines shall be responsible for the withholding of the VAT on the royalties before remitting them to Linde. In remitting to the Bureau of Internal Revenue the VAT withheld on the royalties, Linde Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from Linde Philippines if it is a VAT-registered taxpayer. In case Linde Philippines is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, Linde Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Linde and the fourth copy for Linde Philippines 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Agreement Products means the industrial and medical gas products as listed in appendix 1 attached to the Agreement. 2. Territory shall mean Philippines. 3. Net Sales Value means the sales value of all sales of any Agreement Products manufactured by Licensor, Licensee or third parties and sold by Licensee.