ITAD BIR Ruling No. 253-12

June 8, 2012 ITAD BIR RULING NO. 253-12 Article 12, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-11-10 Fujitsu Philippines, Inc. 2/F United Life Building A. Arnaiz Avenue, Legaspi Village 1229 Makati City Attention: Atty. Rodolfo R. Nicolas, Jr.,CPA In-house Counsel Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on June 2, 2010 on the royalty payments of your company, FUJITSU PHILIPPINES, INC. (FPI),to FUJITSU LIMITED (FL),pursuant to the 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, as amended by its Protocol ("Philippines-Japan tax treaty, as amended") . It is represented that FL, with address at 4-1-1, Kamikodanaka, Nakahara-ku, Kawasaki-shi, Kanagawa 211-8588 Japan, is registered as a taxable person in Japan under tax reference number 540480, to manufacture and sell communications and information processing instruments, as shown in the Certificate of Status of Taxable Person issued by the District Director of Kawasaki-kita Tax Office dated April 6, 2010; that it is not registered as a corporation nor as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated December 4, 2009; and that, on the other hand, FPI is a corporation duly organized and existing under Philippine laws with principal business address at 2nd Floor United Life Building, 837 A. Arnaiz Avenue, Legaspi Village, 1229 Makati City. It is further represented that on April 1, 2009 a TRADE NAME and TRADEMARK LICENSE AGREEMENT ("Agreement") was entered into by and between FL and FPI whereby FL grants to FPI the use of the following: 1. License Name FL grants to FPI a non-transferable, non-sublicensable (except as provided in Section 5 of the Agreement),non-exclusive and restricted license, during the term of the Agreement, to use the License Name ("Fujitsu") as part of FPI's Trade Name in connection with the Business. 2. Trademark Subject to terms and conditions of the Agreement, FL hereby grants to FPI a non-transferable, non-sublicensable (except as provided in Section 5 of the Agreement),non-exclusive and restricted license, during the term of this Agreement, to use and display the Fujitsu Trademarks in the countries, jurisdictions or territories where FL owns any registered trademarks in connection with Business. DaEcTC It is also represented that for the licenses granted under the Agreement, FPI shall pay to FL license fees of 0.5% of FPI's net revenues 1 from the sales to any entities other than FL; that the Agreement shall become effective on April 1, 2009 and be in force for an initial period of one (1) year after the effective date; and that thereafter, it shall remain in force for further period of one (1) year, unless (i) either FL or FPI indicates its intention not to renew the Agreement in writing at least three (3) months prior to the expiration of the initial term or renewed term of the Agreement, or (ii) the Agreement is terminated as a result of the occurrence of any of the events specified in therein. It is finally represented, as shown in the affidavit executed by the President and Chief Executive Officer of FPI dated September 21, 2010, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that royalty income derived by a nonresident foreign corporation is generally subject to tax as provided for under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended. It provides, viz. : "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 . . . royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). . . ." However, Section 32 (B) (5) of the same Tax Code provides as follows: "SEC. 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: 2 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." In connection therewith, Article 12 the Philippines-Japan tax treaty, as amended, which you invoke, may apply to the instant case. It provides, viz. : "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: EDHTAI (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. ..." Based on the above provision, royalty income derived in the Philippines by a corporation which is a resident of Japan shall be taxed at a preferential rate of 15 percent if the payments are in respect of the use of or right to use cinematograph films and films or tapes for radio or television broadcasting; and, where the payor company is BOI-registered engaged in preferred pioneer areas of investment or in all other cases, 10 percent. Considering that the subject royalty payments of FPI to FL are not in respect of the use of or right to use cinematograph films and films or tapes for radio or television broadcasting, the said payments may qualify for the 10 percent preferential tax rate under Article 12 (2) (b) of the Philippines-Japan tax treaty, as amended. 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 15 days before the intended transaction or payment of income, thus: "III. Policies: 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 was 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: IaDcTC " 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) This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary 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 transaction became effective on April 1, 2009 and the subject TTRA was only filed on June 02, 2010 in violation of Section III (2) of RMO 1-2000, this Office hereby DENIES relief on royalties paid by FPI to FL before June 17, 2010 for having been filed beyond the 15-day period prescribed by the RMO. Consequently, said royalties received by FL shall be subject to the income tax rate of 30 percent as provided under the above-cited Section 28 (B) (1) of the Tax Code of 1997, as amended. However, relief is hereby GRANTED on royalties paid by FPI to FL on June 17, 2010 and thereafter, and the same shall be subject to income tax at a reduced rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD 11-10 dated June 16, 2010) aEHIDT Moreover, the above royalty payments shall be subject to value-added tax (VAT) as provided for in Section 108 of the Tax Code of 1997, viz. : "SEC. 108. 3 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%) 4 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' means the performance of all kinds of services in the Philippines for others for a fee, ....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; ... With regard to the procedures for the withholding and the payment of the VAT, FPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to FL. In remitting the VAT withheld, FPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & 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 FPI if it is a VAT-registered taxpayer. In case FPI 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, FPI is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for FL and the fourth copy for FPI as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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. Net Revenues means the aggregate of: - (i) The net revenues of FPI; and - (ii) The net revenues of those direct and indirect subsidiaries of FPI to which it has granted a sub-license. - But disregarding in (i) any revenues to the extent that they comprise receipts of payments from subsidiaries as described in (ii). 2. TITLE II TAX ON INCOME. 3. Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "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, raise the rate of value-added tax to twelve percent (12%),after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%);or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one half percent (1 1/2%). xxx xxx xxx 4. 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.