ITAD BIR Ruling No. 261-12

June 14, 2012 ITAD BIR RULING NO. 261-12 Article 12, Philippines-Japan tax treaty; BIR Ruling No. ITAD 98-11 Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on May 10, 2007 requesting confirmation that service fees, dividends, and royalties paid by International Wiring Systems (Philippines) Corporation ("International Wiring") to Sumidenso Logistics Network Company Ltd. ("Sumidenso Logistics"),Sumitomo Wiring Systems Ltd. ("Sumitomo Wiring") and SIIX Corporation ("SIIX") are subject to preferential treatment 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 ("Philippines-Japan tax treaty"). 1 Facts Sumidenso Logistics, Sumitomo Wiring and SIIX are corporations organized and existing under the laws of Japan and are residents thereof based on their Certificates of Residence issued by the Yokkaichi Tax Office in Japan on July 12, 2006 for Sumidenso Logistics and Sumitomo Wiring and by the Higashi Tax Office in Japan on September 15, 2006 for SIIX. Sumidenso Logistics is situated at 2 Shosen-cho Yokkaichi, Mie, Japan; Sumitomo Wiring at 1-14 Nishisuehiro-cho Yokkaichi, Mie, Japan; and SIIX at 1-4-9, Bingo-machi, Chuo-ku, Osaka, Japan. They are not registered as corporations or partnerships in the Philippines based on the Certifications of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on March 27, 2007. On the other hand, International Wiring is a domestic corporation situated at the Luisita Industrial Park, Special Export Processing Zone, San Miguel, Tarlac City, Tarlac, Philippines. International Wiring is registered with the then Export Processing Zone Authority ("EPZA") as an export enterprise under Certificate of Registration No. 93-04 issued on January 15, 1993. International Wiring manufactures wiring harnesses for cars and motorcycles, low tension wires, corrugated vinyl tubes, parts for applicators, presses for wire harnesses (including anvils and crimpers),and circuit board jigs for wire harnesses. STHAID Service fees paid to Sumidenso Logistics On June 1, 1999, International Wiring and Sumidenso Logistics entered into a Business Service Agreement where International Wiring appointed Sumidenso Logistics as its trustee to transact its transportation business in Asia and the United States of America. Sumidenso Logistics will collect information for International Wiring necessary for the latter's transportation business, facilitate such business with Sumitomo Electric Wiring Systems, Inc. , and act on other matters entrusted by International Wiring. In consideration, International Wiring will pay service fees to Sumidenso Logistics amounting to US$50.00 for every twenty-foot container and US$100.00 for every forty-foot container of products handled by Sumidenso Logistics for International Wiring. The service fees will be paid every month. The Agreement lasted for only a period of six month beginning June 1, 1999. Dividends paid to Sumitomo Wiring and SIIX On April 1, 2006, International Wiring (through a resolution approved by its Board of Directors) declared cash dividends of US$453,669.00 or US$0.0097 per share of stock) in favor of Sumitomo Wiring ,SIIX and another stockholder. The dividends were paid on June 30, 2006. As of the dates of declaration and payment of the dividends, Sumitomo Wiring and SIIX hold, respectively, 80 percent and 10 percent of the total outstanding shares of International Wiring. Royalties paid to Sumitomo Wiring On July 1, 2002, Sumitomo Wiring and International Wiring entered into a Technical Assistance Agreement where Sumitomo Wiring granted International Wiring a non-exclusive right and license to manufacture in the Philippines, wiring harnesses for automobiles (the "Licensed Products" ) by using related knowledge, experience, know-how and information thereon ("Technical Information") belonging to Sumitomo Wiring. The Licensed Products will be sold in Australia and other countries. In consideration, International Wiring will pay Sumitomo Wiring the following: a) License fee of 162,352,000.00. Payable by making of 8 equal payments of 20,294,000.00 on or before the last day of August and February of each year for four years. b) Running royalty of 3 percent based on the net selling price of the Licensed Products sold by International Wiring. Payable on or before the last day of August and February of each year throughout the term of the Agreement. SECATH Ruling In reply, 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 relief 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 subject of the TTRA, to wit: "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 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. SATDHE 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 is upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement 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 May 10, 2007, and the incomes subject thereof were paid before that date in the case of service fees ,from July to December 1999 ;in the case of dividends ,on June 30, 2006 ;in the case of license fee ,in August 2002 ,in February and August 2003, 2004 and 2005 ,and in February 2006 ;and in the case of the running royalty ,some of which are paid in August 2002 and in February and August of the succeeding years ,this Office hereby DENIES relief on these incomes for having the TTRA filed beyond the prescribed period of at least fifteen days before the payment of the income, as required in Section III (2) of RMO 1-2000. Accordingly, said incomes paid by International Wiring to Sumidenso Logistics, Sumitomo Wiring and SIIX shall be subject to income tax at the rate of 35 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,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%)" 2 LLphil On the other hand, with respect to the running royalty paid to Sumitomo Wiring on May 25, 2007 and thereafter , this income is subject to relief under paragraphs 1, 2 and 3, Article 12 of the Philippines-Japan tax treaty which provide, to wit: " 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: 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) 25 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. IEcaHS 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." The Protocol reduced the rate of income tax in paragraph 2 (b) to 10 percent, thus: "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: xxx xxx xxx b) 10 per cent of the gross amount of the royalties in all other cases." Under Article 12, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the royalties are paid by a company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentive laws of the Philippines; (b) 15 percent 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 (c) before January 1, 2009, 25 percent, and beginning January 1, 2009 and thereafter, 10 percent, in all other cases. The term royalties 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 ("know-how"). ICAcHE Accordingly, since the running royalty paid by International Wiring to Sumitomo Wiring under the Technical Assistance Agreement is not in respect of the use of, or the right to use, cinematograph films and films or tapes for radio or television broadcasting, but of know-how, and since International Wiring is not registered with the Board of Investments as such, the royalty paid to Sumitomo Wiring on May 25, 2007 and before January 1, 2009 shall be subject to income tax at the rate of 25 percent, and that paid on January 1, 2009 and thereafter shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty. (BIR Ruling No. ITAD 98-11 dated March 21, 2011) B. * On value-added tax Finally, under Section 108 (A) of the Tax Code, the license fee and running royalty paid by International Wiring to Sumitomo Wiring under the Agreement, being payments for the use of intangible property (know-how) 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, raise the rate of value-added tax to twelve percent (12%) 3 ..." However, since International Wiring , originally registered with the then EPZA, is now administered by the Philippine Economic Zone Authority ("PEZA") and is entitled to the same fiscal incentives available to PEZA-registered enterprises under Republic Act No. 7916 ,4 the Supreme Court ruled in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) ,that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus .Where the law does not distinguish, we ought not to distinguish. TCIHSa Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis .An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum .When anything is prohibited directly, it is also prohibited indirectly." This being the case, since Sumitomo Wiring is a nonresident lessor of intangible property and not a VAT-registered taxpayer, the license fee and running royalty paid by International Wiring to Sumitomo Wiring shall be exempt from VAT rather than subject to VAT at zero percent. 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. As amended by the Protocol Amending 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 effective January 1, 2009. 2. Original wordings of this section prior to its amendment on July 1, 2005 reads: "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 subparagraphs (C) and (d): Provided, That effective 1, * 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%)." 3. The VAT rate was increased to 12 percent 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. 4. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes. Section 11 thereof provides: "CHAPTER II GOVERNING STRUCTURES SECTION 11. The Philippine Economic Zone Authority (PEZA) Board. There is hereby created a body corporate to be known as the Philippine Economic Zone Authority (PEZA) attached to the Department of Trade and Industry . . . The existing Export Processing Zone Authority (EPZA) created under Presidential Decree No. 66 shall evolve into the PEZA in accordance with the guidelines and regulations set forth in an executive order issued for this purpose."