ITAD BIR Ruling No. 249-12

June 7, 2012 ITAD BIR RULING NO. 249-12 Article 12 (Royalties) Philippines-Australia tax treaty Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas Street Makati City Attention: Mary Assumption S. Bautista-Villareal Principal, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on February 2, 2005 requesting confirmation that testing fees paid by the branch office in the Philippines of IDP Education Australia Ltd. ("IDP Australia") (formerly International Development Program of Australian Universities and Colleges Ltd.) to IELTS Australia Pty. Ltd. ("IELTS Australia") are not in the nature of royalties and are exempt from income tax pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Australia tax treaty") . Facts IELTS Australia and IDP Australia are foreign corporations in Australia and both are located at 1 Geils Court, Deakin, Australia. IDP Australia is licensed to establish a branch office in the Philippines under Company Registration No. A200118133 issued by the Securities and Exchange Commission on December 13, 2001. The purposes of the branch office are to provide information on Australian education to students, teachers, parents, institutions, government ministries and other interested parties; undertake project and consulting activities; provide assistance (including English language proficiency testing and Internet-based application services) to students wishing to enroll in Australian educational institutions; and undertake joint activities in the Philippines. The branch office ("IDP Philippine Branch") is located at the 2nd Floor, Pioneer House, 108 Paseo de Roxas Street, Makati City, Philippines. On November 10, 1999, IELTS Australia ,the Chancellor Masters and Scholars of the University of Cambridge and the British Council (collectively, the "IELTS Partners") entered into an Agreement Relating to the International English Language Testing System Examination ("IELTS Exam") which outlined the respective rights and responsibilities of each partner to the IELTS Exam which was produced, developed, and owned by the IELTS Partners .Under the Agreement, IELTS Australia and the British Council may administer the IELTS Exam worldwide. The IELTS Exam is a test of English language communicative proficiency for prospective immigrants and workers to Australia, Canada, New Zealand, the United Kingdom of Great Britain and Northern Ireland and the United States of America. HATEDC On December 17, 2004 , IELTS Australia and IDP Australia entered into an Agreement where IELTS Australia granted IDP Australia the right to administer the IELTS Exam through the latter's network offices in Hong Kong, Malaysia, Mauritius, Philippines, Singapore, Thailand, Vietnam and other countries. Under the Agreement, IELTS Australia likewise granted IDP Australia the right to use the IELTS Brands in connection with the administration and marketing of the IELTS Exam. IELTS Brands means the business names, logos, symbols, service marks and trademarks owned by the IELTS Partners in connection with the IELTS Exam. In consideration, IDP Australia will pay testing fees to IELTS Australia every month. The fees are payable within fourteen days from receipt of invoice and to be remitted at the latter's account at the National Australia Bank located at 39 London Circuit, Canberra, Australia. For IDP Philippine Branch ,the testing fee payable to IELTS Australia is 97.50 Australian dollars. The Agreement had an initial term of five years from January 1, 2003 to December 31, 2007, and may be extended by the parties thereafter. Based on a sample invoice issued by IDP Philippine Branch in 2008, for every P8,960.00 (208.00 Australian dollars) it charges each examinee of the IELTS Exam, 97.50 Australian dollars (46.875 percent) will be paid to IELTS Australia as testing fee pursuant to the Agreement and the remaining 110.50 Australian dollars (53.125 percent) will be retained to IDP Philippine Branch . Ruling Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") ,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 at least fifteen days before the intended transaction or payment of income, thus: "III. Policies: DSTCIa In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. ,payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief ..." (Emphasis ours) This condition is emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: " However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation . In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same . The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Emphasis ours) cDAEIH This decision of the Court of Tax Appeals is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. Furthermore, the requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011) . In view of the foregoing, since the subject TTRA was filed on February 2, 2005 and the Agreement between IDP Australia and IELTS Australia that gives rise to the payment of the testing fees has been in effect since January 1, 2003 ,this Office hereby DENIES relief on fees paid by IDP Philippine Branch to IELTS Australia before the fifteenth day of filing the TTRA or before February 17, 2005 , pursuant to Section III (2) of RMO 1-2000. Accordingly, said fees shall be subject to income tax under Section 28 (B) (1) of the National Internal Revenue Code of 1997, 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, testing fees paid to IELTS Australia on February 17, 2005 and thereafter are subject to relief under paragraphs 1, 2 and 3, Article 12 of the Philippines-Australia tax treaty, which provide: TCDHaE "Article 12 ROYALTIES 1. Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed a) 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 b) in all other cases, 25 per cent of the gross amount of the royalties. 3. The term 'royalties' in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; b) the use of, or the right to use, any individual, commercial or scientific equipment; c) the supply of scientific, technical, industrial or commercial knowledge or information; d) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a),any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); DTAHSI e) the use of, or the right to use (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; or f) total or partial forbearance in respect of the use of a property or right referred to in this paragraph." Under Article 12, royalties arising in the Philippines and paid to a resident of Australia may be taxed in the Philippines at a rate not to exceed (a) 15 percent if the royalties are paid by an enterprise registered with the Board of Investments and engaged in preferred areas of activities, and (b) 25 percent in all other cases. The term royalties means payments or credits in consideration for the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right, among others. Accordingly, since IDP Philippine Branch is not registered with the Board of Investments as such, the testing fees for the IELTS Exam it paid to IELTS Australia on February 17, 2005 and thereafter as royalties shall be subject to income tax at the rate of 25 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Australia tax treaty. On our basis of treating the testing fee as royalties, take note that under the Agreement between IDP Australia and IELTS Australia, IDP Australia (through IDP Philippine Branch ) is given the right to administer and market the IELTS Exam in the Philippines and to use the IELTS Brands in connection therewith. The IELTS Brands are the business names, logos, symbols, service marks and trademarks owned by the IELTS Partners and which are generally regarded as trademarks under the definition of royalties in paragraph 3, Article 12 of the treaty. Furthermore, with respect to income derived by IDP Philippine Branch in administering and marketing the IELTS Exam in the Philippines, this is subject to income tax under Section 28 (B) (1) of the Tax Code, to wit: STcHDC "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." Finally, under Section 108 (A) of the Tax Code, the testing fees, being payments for the use of intangible property (trademark) 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: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%) ..." Relative thereto, IDP Philippine Branch shall withhold VAT on the testing fees at the rate of 10 (before February 1, 2006) and 12 percent (beginning February 1, 2006 and thereafter),before remitting them to IELTS Australia . IDP Philippine Branch 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 IDP Philippine Branch's claim of input tax on the payments; otherwise, if IDP Philippine Branch is not a VAT-registered taxpayer, it may treat the VAT 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. 2 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. AHECcT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent beginning 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. 2. Pursuant to Section 4.112-2 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 corporations, individuals, estates and trusts, 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 (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. 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.