ITAD BIR Ruling No. 250-11

November 10, 2011 ITAD BIR RULING NO. 250-11 Article 10, Philippines-Germany Tax Treaty; BIR Ruling No. ITAD-013-11 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Mark Anthony P. Tamayo Gentlemen : This refers to your tax treaty relief application filed on May 4, 2011, on behalf of Henkel AG & Co. KGaA ("Henkel AG") , requesting confirmation that the royalty payments by Henkel Philippines, Inc. ("Henkel Phils") to Henkel AG are subject to preferential tax rate of ten percent, pursuant to Article 12 of the Convention between the Government of the Republic of the Philippines and the Government of the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Germany tax treaty"). It is represented that Henkel AG , with address at Henkelstrasse 67, D-40191 Dusseldorf, Germany, is a resident of Germany within the meaning of the Philippines-Germany tax treaty, based on the Certificate of Residence issued by the German Tax Administration dated November 29, 2010; that Henkel AG 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 February 18, 2011; and that, on the other hand, Henkel Phils is a domestic corporation duly organized and existing under Philippine laws located at the 2/F Unit 202, Alabang Business Tower, Acacia Avenue, Madrigal Business Park, Ayala Alabang, Muntinlupa City. It is further represented that on February 3, 2011, Henkel Phils , as the Licensee, and Henkel AG , as the Licensor, entered into an Agreement for the License of Intellectual and Industrial Property Rights ( "Agreement" ), whereby Henkel AG grants to Henkel Phils the license to use the HENKEL-Rights 1 and the Proprietary Information and Technology 2 for the business units specified in Schedule 1 3 of the Agreement in the Territory. 4 aHECST Moreover, it is represented that in consideration of the grant, Henkel Phils shall pay Henkel AG a running royalty on the aggregate net external sales of Henkel Phils at the amount specified in Schedule 1 5 of the Agreement, the rate depending on the business unit to which the products relate; that royalties under the Agreement shall be due and payable in Euro within 30 days of the date of invoice sent by Henkel AG ; and that the Agreement complies with provisions of Sections 87 and 88 of Chapter IX, Part II of the Intellectual Property Code on Voluntary Licensing, as certified by Philippines' Intellectual Property Office per its issuance of the Certificate of Compliance No. 5-2010-00076 dated February 3, 2011. It is finally represented, based on the Sworn Statement by Henkel Phils on May 3, 2011, 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. In reply, please be informed that royalty payments to 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: "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 accordance with the foregoing, Article 12 of the Philippines-Germany tax treaty which you invoked may apply to the subject request for ruling. It provides: cDCSTA "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 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. 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 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" Based on the foregoing, royalty payments to a resident of Germany arising in the Philippines may be taxed at the preferential tax rate of 15 percent 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; and 10 percent if the royalties are paid for the use or the right to use, patent, trademark, design or model, plan, secret formula or process for the industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. However, the 10 percent rate shall only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. Considering that the subject royalties paid by Henkel Phils to Henkel AG under the Agreement fall under Article 12 (2) (b) of the aforementioned tax treaty, being derived from the grant of a right to sublicenses, technologies, patents and patent applications in the field of agricultural seed and biotechnology, and that the Agreement has been approved by a Philippine competent authority i.e ., the IPO, such are considered royalties arising in the Philippines and thus subject to Philippine tax at the rate of 10 percent of the gross amount thereof, beginning May 4, 2011, 6 pursuant to Article 12 (2) (b) of the Philippines-Germany tax treaty. (BIR Ruling No. ITAD-013-11 dated January 19, 2011) 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%) 7 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. IDTSEH 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, Henkel Phils shall be responsible for the withholding of VAT on the royalties before remitting them to Henkel AG . In remitting to the Bureau of Internal Revenue the VAT withheld, Henkel Phils shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, Henkel Phils 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, Henkel Phils may include as part of the cost of the royalty fees to it by Henkel AG the VAT consequently shifted or passed on to it. In addition, Henkel Phils is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Henkel AG and the fourth copy for Henkel Phils 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. "HENKEL-RIGHTS" shall mean all patents, trademarks, copy-rights, trade dresses and all other intellectual property rights, registered or unregistered, which (i) HENKEL owns in the Territory or will own in the Territory during the term of this Agreement, or (ii) for which HENKEL has obtained or will obtain a license from third parties with the right for HENKEL to grant sub-licenses, relating to the business units specified in Schedule 1 to this Agreement. 2. "Proprietary Information and Technology" shall mean all information (i) owned by HENKEL, or (ii) licensed to HENKEL by the third parties with the right for HENKEL to grant sub-licenses, including technological developments and inventions, plans, drawings, blue-prints, designs, manufacturing processes, application technology, formulae, specifications, technical service information. 3. "Schedule 1" shall mean U-A (former Technologies). 4. "Territory" shall mean the territories of Licensee ( i.e ., Philippines and countries in which Licensee may conduct its export business) and such additional countries as may be mutually agreed upon from time to time for specific product lines. 5. 1.0%. 6. Pursuant to Sections 13 and 14 of Revenue Memorandum Order No. 72-2010 (Guidelines in the Processing of Tax Treaty Relief Applications). 7. 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.