ITAD BIR Ruling No. 262-12

June 14, 2012 ITAD BIR RULING NO. 262-12 Article 12, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 48-10; BIR Ruling No. ITAD 11-10 Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Zayber B. Protacio Principal, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on February 13, 2009 requesting confirmation that royalties paid by Panasonic Communications Philippines Corporation ("Panasonic Philippines") (formerly, Panasonic Communications Corporation of the Philippines ) to Panasonic Communications Kyushu Company, Ltd. ("Panasonic Kyushu") are subject to income tax at the rate of 10 percent 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") , as amended by a Protocol 1 effective January 1, 2009. Facts Panasonic Kyushu is a foreign corporation organized and existing under the laws of Japan and is a resident thereof Japan based on its Residence Certificate issued by the Miyazaki Tax Office in Japan on January 15, 2009. Panasonic Kyushu is situated at 7826-28 Shimotajima Sadowara-Cho, Miyazaki, Japan. Panasonic Kyushu is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on February 11, 2009. On the other hand, Panasonic Philippines is a domestic corporation situated at Lot C3-8 Carmelray Industrial Park II, Calamba, Laguna, Philippines. Panasonic Philippines is registered with the Philippine Economic Zone Authority ("PEZA") as an Ecozone Export Enterprise under amended Certificate of Registration No. 00-075 issued on September 8, 2000. On April 1, 2008, Panasonic Philippines and Panasonic Kyushu entered into a Technical Know-How Agreement where Panasonic Kyushu granted Panasonic Philippines the right to use its technical know-how (including product know-how and manufacturing process know-how) which is relevant in the manufacture of the cooling fan units, flexible printed circuits, and other items. Panasonic Kyushu will furnish Panasonic Philippines with a set of technical information consisting of CDcHSa 1. Product specifications; 2. Manufacturing specifications for the products; 3. List of materials; 4. Test and inspection specifications for the products; 5. Inspection specifications describing necessary details of quality control; and 6. Information for improvement in quality, technology and productivity of the Products. In consideration, Panasonic Philippines will pay Panasonic Kyushu a technical know-how fee equivalent to 5 percent of the sales prices of the products manufactured and sold, used, or otherwise disposed of by Panasonic Philippines . The fee will be calculated every six months, from April 1 to September 30, and from October 1 to March 31 of the following calendar year, and up to the expiration or termination of the Agreement. Panasonic Philippines will pay the fee within 60 days from the end of that period. The Agreement took effect on April 1, 2008 and remained in effect up to December 31, 2010. Ruling A. On income tax 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: ISDHEa 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: " 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) HSaCcE This decision is upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, this 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 Agreement was in effect from April 1, 2008 to December 31, 2010, and Panasonic Philippines paid technical know-how fees to Panasonic Kyushu within 60 days from September 30, 2008, from March 31 and September 30, 2009 and 2010, and from December 31, 2010, but the subject TTRA was filed on February 13, 2009 , this Office hereby DENIES relief on those fees paid before February 28, 2009. Accordingly, said fees shall be subject to income tax at the rate prescribed in 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%)." AaIDHS On the other hand, the technical know-how fees paid by Panasonic Philippines to Panasonic Kyushu on February 28, 2009 and thereafter for the use by Panasonic Philippines of the relevant technical know-how belonging to Panasonic Kyushu on the manufacture of cooling fan units, flexible printed circuits, and other items, are subject to relief under paragraph 2, in relation to paragraph 3, Article 12 of the Philippines-Japan tax treaty, 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. xxx xxx xxx 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." IHcTDA The Protocol amended paragraph 2 (b) as follows: "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." As mentioned, 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) 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 (b) before January 1, 2009, 25 percent, and beginning January 1, 2009, 10 percent, in respect of all other types of royalties. 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"). Accordingly, the technical know-how fees paid by Panasonic Philippines to Panasonic Kyushu on February 28, 2009 and thereafter , being royalties for the use of know-how and not for cinematograph films and films or tapes for radio or television broadcasting, shall be subject to income tax at the rate of 10 percent. (BIR Ruling No. ITAD 33-11 dated January 28, 2011; BIR Ruling No. ITAD 37-11 dated February 2, 2011) B. On value-added tax Under Section 108 (A) of the Tax Code, the technical know-how fees paid by Panasonic Philippines to Panasonic Kyushu , being payments for the use of intangible properties 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. AICEDc (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, 2 raise the rate of value-added tax to twelve percent (12%) . . ." However, since Panasonic Philippines is registered with PEZA and covered by the provisions of Republic Act No. 7916, 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. 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. HTCSDE 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." Accordingly, since Panasonic Philippines is not subject to VAT directly on its sale of goods and supply of services to its customers, and indirectly on its purchase of goods and services when such purchase is subject to VAT, such royalties paid by Panasonic Philippines to Panasonic Kyushu , a foreign corporation and not a VAT-registered taxpayer, shall be exempt from VAT instead of being 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. 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. 2. 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.