ITAD BIR Ruling No. 227-11

September 12, 2011 ITAD BIR RULING NO. 227-11 Article 12, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 065-10; BIR Ruling No. ITAD 048-10; BIR Ruling No. ITAD 011-10; BIR Ruling No. DA-ITAD 044-09; BIR Ruling No. DA-ITAD 047-07 Panasonic System Networks Phils. Corp. Bldg. 2 102 Laguna Blvd., Bo. Don Jose Laguna Technopark, Sta. Rosa City, Laguna, Philippines Attention: Hiroyuki Nishida Director of Finance Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on March 30, 2011 on behalf of Panasonic System Networks Co., Ltd. ("Panasonic-Japan") requesting for a ruling that the royalty payments of Panasonic System Networks Phils. Corp. ("Panasonic-Philippines") to Panasonic-Japan are subject to the preferential withholding tax rate of 10 percent pursuant to the amended Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty, as amended") . EHTCAa It is represented that Panasonic-Japan is a corporation organized and existing under the laws of Japan per its Articles of Incorporation; that Panasonic-Japan has its principal place of business at 1-62 4-Chome, Minoshima Hakata-Ku, Fukuoka-shi, Fukuoka, Japan; that Panasonic-Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty as certified by the District Director of Hakata Tax Office on March 22, 2011; that Panasonic-Japan is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission ("SEC") on April 6, 2011; that, on the other hand, Panasonic-Philippines is a corporation organized and existing under the laws of the Philippines with principal office at Bldg. 2, 102 Laguna Blvd., Bo. Don Jose, Laguna Technopark, Sta. Rosa City, Laguna. It is further represented that Panasonic-Japan has rights to provide and/or license certain intellectual property rights, including patent, design, and utility model rights ("Intellectual Property Rights" or "IPRs"), with respect to the manufacture or sale of certain electronic components such as optical disc drives, analog type plain paper copiers, digital type plain paper copiers, multi-function products that function as printer/scanner/facsimile machine, facsimiles, laser scanners, and options and consumables for these items (collectively, "Products"); that Panasonic-Japan likewise owns certain technical know-how related to the manufacture of its Products including product know-how and manufacturing process know-how (collectively, "Technical Know-How"); that Panasonic-Japan entered into a Technical Know-How and Intellectual Property Rights License Agreement ("License Agreement") with Panasonic-Philippines on January 18, 2011; that under the License Agreement, Panasonic-Japan will provide Technical Know-How and grant non-exclusive and non-transferable license over its Intellectual Property Rights to Panasonic-Philippines ; that under Article 2 of the License Agreement, technical know-how shall be provided by means of technical information, advice and/or services; that at the reasonable request of Panasonic-Philippines in writing from time to time during the term of the License Agreement, and upon the prior consent of Panasonic-Japan thereto, Panasonic-Japan will receive employees of Panasonic-Philippines at Panasonic-Japan's facility manufacturing, developing and/or designing the Products for such periods Panasonic-Japan and Panasonic-Philippines deem necessary for training Panasonic-Philippines' employees, and/or will send its engineers to Panasonic-Philippines' facility for such periods Panasonic-Japan and Panasonic-Philippines deem necessary, to provide technical service to Panasonic-Philippines ; that direct costs and expenses incurred by Panasonic-Japan for the technical services that might be rendered under the License Agreement, including, by way of example, those for accommodation, transportation, round-trip air travel from and to Japan by economy class, salaries and allowances, shall be borne by Panasonic-Philippines ; that under Article 3 of the License Agreement, Panasonic-Japan grants Panasonic-Philippines "(i) a non-exclusive and non-transferable license, with no right to sub-license, to use the Technical Know-How provided by [Panasonic-Japan] to [Panasonic-Philippines], (ii) a non-exclusive and non-transferable license, with no right to sub-license, to use the Panasonic IPRs, and (iii) permission to use the Cross IPRs to manufacture the Products of [Panasonic-Philippines]'s factory in the Philippines, have the Products manufactured to the extent allowed by a third party and . . . to use, offer to sell, lease, import, export and/or otherwise dispose of the Products within and outside the Philippines; that in consideration of the technical information and license that Panasonic-Japan will provide, Panasonic-Philippines will pay "technical assistance fee" equivalent to 5 percent of the sales of the Products manufactured and sold, used, or disposed of by Panasonic-Philippines during certain time periods referred to as "Calculation Periods," which is a period commencing on April 1 and ending September 30 of any calendar year, or the period commencing on October 1 of any calendar year and ending on March 31 of the following calendar year; that the "technical assistance fee" is payable within 60 days after the end of each Calculation Period and is payable either in United States Dollars or in Japanese Yen by telegraphic transfer to Panasonic-Japan's designated bank account. It is finally represented that the issue or transaction subject of this request or 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 as per the Sworn Statement issued by the Director of Finance and Administration Group of Panasonic-Philippines dated March 25, 2011. In reply, please be informed that a foreign corporation like Panasonic-Japan , whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides: DTAaCE "Section 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) from income tax to the extent required by any treaty obligation binding upon the Philippine Government. 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." Hence, the provisions of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. For the remuneration that will be paid for the technical know-how and the license under the License Agreement, Article 12 of the Philippines-Japan tax treaty is relevant. It provides: "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: SaIHDA (a) 15 per cent of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; (b) 10 per cent of the gross amount of the royalties in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties 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 to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 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 and films or tapes for radio or television broadcasting, 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. xxx xxx xxx" Under paragraphs 2 and 3, Article 12 of the Philippines-Japan tax treaty, as amended, royalties arising in the Philippines and paid to a resident of Japan may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed (a) 15 percent of the gross amount of the royalties if the royalties are paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting; (b) 10 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; and (c) 10 percent of the gross amount of the royalties in all other cases [specifically, royalties in respect of the use or the right to use of any copyright of literary, artistic or scientific work (except cinematograph films and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, information concerning industrial, commercial or scientific experience, and payments for the lease of industrial, commercial or scientific equipment]. Accordingly, the "technical assistance fee" to be paid by Panasonic-Philippines to Panasonic-Japan for the license and the technical know-how pursuant to the License Agreement submitted, being essentially royalties for the use or the right to use of trademark, patent, design, and utility model rights, is subject to income tax at the preferential rate of 10 percent of the gross amount thereof pursuant to Article 12 (a) of the Philippines-Japan tax treaty, as amended. ( BIR Ruling No. ITAD 065-10 dated November 30, 2010 ; BIR Ruling No. ITAD 048-10 dated October 6, 2010 ; BIR Ruling No. ITAD 011-10 dated June 16, 2010 ) aDTSHc Aside from income tax, such royalties, being payment for the lease of property in the Philippines, are subject to value-added tax (VAT), under Section 108 (A) of the NIRC, as amended, thus: "Section 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; xxx xxx xxx" With regard to the procedures for withholding and paying 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 Panasonic-Philippines shall be responsible for the withholding of the VAT on the royalties and fees for the technical services before remitting them to Panasonic-Japan . In remitting to the Bureau of Internal Revenue the VAT withheld, Panasonic-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Panasonic-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. In addition, Panasonic-Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Panasonic-Japan and the fourth copy for Panasonic-Philippines as its file copy. This ruling is issued on the basis of the foregoing 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. ESTaHC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue