ITAD BIR Ruling No. 268-12

June 27, 2012 ITAD BIR RULING NO. 268-12 Article 12, Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-042-10 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Fabian K. delos Santos Partner, Tax Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on January 27, 2012, on behalf of Movenpick Holding AG ("Movenpick") ,requesting confirmation that the royalty payments to Movenpick by Oikonomos International Resources Corp. ("Oikonomos") are subject to the 15 percent preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that Movenpick, with address at Luzernestrasse 9, 6330 Cham, Switzerland, is a corporation organized and existing under the laws of Switzerland and is a resident of Switzerland per Certificate of Fiscal Residence issued by the Cantonal Tax Administration on July 25, 2011; that Movenpick 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, Cebu Extension Office dated September 5, 2011; and that, on the other hand, Oikonomos is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at Movenpick Resort and Spa Cebu Mactan Island, Lapu-Lapu City. It is further represented that Oikonomos is the owner of a hotel in the Mactan Island, Lapu-Lapu City, Cebu, Philippines ("Hotel") ;that Movenpick and Oikonomos entered into a Trade Mark License Agreement ("Agreement") which commenced on March 28, 2011 and shall continue for as long as the Management Agreement between Movenpick and Oikonomos remains in force; Movenpick grants to Oikonomos a license to use trademark "Mvenpick" in connection with the name of the Hotel, the operation of the Hotel in accordance with the Movenpick Standards and the promotion and marketing of the Hotel; that in consideration of the rights and licenses granted to Oikonomos by Movenpick, Oikonomos agrees to pay a royalty of 1% of the Revenue 1 of the Hotel. It is finally represented, based on the Sworn Statement by Oikonomos on September 22, 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%). TcSCEa 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 13 of the Philippines-Switzerland tax treaty may apply to the subject payments. It provides: "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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. 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 cinematographic films and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the aforequoted provisions the tax imposed on royalties derived by a resident of Switzerland like Movenpick from sources within the Philippines may be taxed in the Philippines at a rate not exceeding 15 percent of the gross amount of the royalties. However, since the Agreement that gives rise to the royalties is effective from March 28, 2011 and shall continue for as long as the Management Agreement is in force, and that the subject TTRA was filed only on January 27, 2012, this Office hereby DENIES relief on those royalties paid by Oikonomos to Movenpick before January 28, 2012. 2 Said royalties shall be subject to income tax at the rate of 30 percent as provided under Section 28 (B) (1) of the Tax Code of 1997. With respect to royalties paid by Oikonomos to Movenpick beginning January 28, 2012 this Office hereby holds that said royalties shall be subject to income tax at the reduced rate of 15 percent of the gross amount thereof, pursuant to Article 12 (2) of the Philippines-Switzerland tax treaty. 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. IATSHE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "Revenue" shall mean the Gross Revenue as defined in the Management Agreement. 2. Pursuant to Section 14 of Revenue Memorandum Order No. 72-2011 (Guidelines on the Processing of the Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties.