ITAD BIR Ruling No. 235-15

July 27, 2015 ITAD BIR RULING NO. 235-15 Article 12, Philippines-Korea Tax Treaty Tantoco Villanueva De Guzman & Llamas Law Offices 4th & 6th Floors, Filipino Building 135 Dela Rosa Street, Legaspi Village Makati City Attention: Atty. Cristina M. F. Villanueva Atty. Michael Dennis D. Rayala Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on April 4, 2012, on behalf of YD Online Corporation ("YD Online"), requesting confirmation that the royalty payments by Level Up! Inc. ("Level Up") to YD Online are subject to a preferential tax rate of 10 percent, pursuant to Article 12 of the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty"). ASEcHI It is represented that YD Online, with address at 16, Teheran-ro 14-gil, Gangnam-gu, Seoul, Korea, is a resident of Korea within the meaning of the Philippines-Korea tax treaty, based on the Certificate of Residence issued by the Yeoksam District Tax Office dated April 26, 2012; that YD Online is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on April 4, 2012; that on the other hand, Level Up is a domestic corporation duly organized and existing under Philippine laws with office address at the 11/F, Pacific Star Building, Makati corner Sen. Gil Puyat Avenue, Makati; and that Level Up is duly registered with the Board of Investments (BOI) as pioneer for new IT service firm in the field of an application service provider, under Certificate of Registration No. 2003-007 per April 23, 2004 Board Minutes. It is further represented that on April 1, 2012, YD Online, (as the Licensor) IP Global Holdings, Corp., ("IP Global") (as the Licensee) and Level Up, as (New Licensee) entered into a Novation Agreement ("Agreement"); that pursuant to License Agreement dated November 26, 2009 between YD Online and IP Global, YD Online granted IP Global the exclusive rights to publish and distribute the online game, BANDMASTER in the Philippines; that YD Online, IP Global and Level Up agreed that Level Up substitutes IP Globe in of all the rights and obligations under the License Agreement; that in consideration of the grant of exclusive license for the Licensed Program in the Philippines, Level Up agrees to pay YD Online a fee on One Hundred Thousand Dollars (100,000) United States dollar, the sum of which shall be paid as follows: a) Fifty Thousand Dollars ($50,000) United States dollar within seven (7) working days after the signing of the Agreement; and b) Fifty Thousand Dollars ($50,000) United States dollar (7) working days after the Closed Beta Date of the Licensed Program in the Philippines. Moreover, Level Up will pay license fee of 25% of the Gross Sales Revenue generated from any and all of its income generating activities. It is represented that based on sworn certification dated November 23, 2012 issued by Level Up, royalty payments were remitted by Level Up to YD Online on July 20, 2012. It is finally represented, based on the Sworn Statement by Level Up on April 2, 2012, that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. ITAaHc In reply, please be informed that royalties derived in the Philippines by a nonresident foreign corporation are, in general, covered by Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It provides: "Section 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 . . ., royalties . . .: 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 that: "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. CHTAIc xxx xxx xxx" In relation thereto, Article 12 of the Philippines-Korea tax treaty which you invoked may apply to the herein case. It 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 if such resident is the beneficial owner of the royalties. 2. However, such royalties may be taxed in the Contracting 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 15 per cent of the gross amount of the royalties. 3. Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, 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 right to use, any copyright of literary, artistic or scientific work, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television or tapes for the use of radio broadcasting. EATCcI xxx xxx xxx" Based on the foregoing, royalty payments to a resident of Korea arising in the Philippines may be taxed at the preferential tax rate of 15 percent of the gross amount of the royalties and 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. Such being the case and considering that YD Online is a resident of Korea and Level Up is BOI-registered enterprise engaged in preferred pioneer areas of investment, this Office is of the opinion and so holds that the royalty payments by Level Up to YD Online consisting of USD100,000 license fee for the Licensed Program, and the 25 percent generated by Level Up from its income under the Agreement shall be subject to 10 percent of the gross amount of the royalties, pursuant to Article 12 (3) of the Philippines-Korea 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): "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 No. 4-2002, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, Level Up shall be responsible for the withholding of VAT on the royalties before remitting them to YD Online. In remitting to the Bureau of Internal Revenue the VAT withheld, Level Up shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, Level Up 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, Level Up may include as part of the cost of the royalty fees to it by YD Online the VAT consequently shifted or passed on to it. In addition, Level Up is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for YD Online and the fourth copy for Level Up as its file copy. DHITCc 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. 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.