ITAD BIR Ruling No. 271-12

June 27, 2012 ITAD BIR RULING NO. 271-12 Article 12, Philippines-Japan tax treaty, as amended Fujitsu Ten Corp. of the Philippines 100 South Science Ave., Laguna Technopark Don Jose Sta. Rosa, Laguna Attention: Mr. Masahiko Enoki President Gentlemen : This refers to your letter dated June 16, 2009, on behalf of Fujitsu Ten Limited (hereinafter referred to as "Fujitsu Japan" ) requesting confirmation that the royalty payments of your company, Fujitsu Ten Corporation of the Philippines (hereinafter referred to as "Fujitsu Philippines" ) to Fujitsu Japan pursuant to a Memorandum of Agreement are subject to 10 percent final tax under Article 12, paragraphs 2 and 3 of 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 a Protocol 1 ("Philippines-Japan tax treaty"). It is represented that Fujitsu Japan is a foreign corporation duly organized and existing under the laws of Japan and a resident thereof with address at 2-28, Gosho-dori, 1-chome, Hyogo-ku, Kobe, Hyogo, Japan as evidenced by the Certificate of Residence issued by the District Director of Hyogo Tax Office dated May 26, 2009; that it is not registered as a corporation nor as a partnership in the Philippines per a Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated February 16, 2009; that it is a manufacturer and seller of electronic devices for automobiles; on the other hand, Fujitsu Philippines is a corporation duly organized and existing under Philippine laws and is registered with the Philippine Economic Zone Authority under Certificate of Registration No. 01-063 issued on October 29, 2001, engaged in the manufacture of car audio and car electronic products. It is further represented that on April 1, 2008, a Memorandum of Agreement, (hereinafter referred to as "Agreement" ) was entered into by and between Fujitsu Japan and Fujitsu Philippines ; that Fujitsu Japan is engaged in the design and manufacture of various products which are distributed and sold in various parts of the world; that Fujitsu Japan grants to Fujitsu Philippines the license and authority to use Fujitsu Japan 's industrial properties and know-how relating to the Licensed Products; 2 that for and in consideration of the foregoing license and authority granted by Fujitsu Japan to Fujitsu Philippines to use Fujitsu Japan 's industrial properties and know-how relating to the Licensed Products, Fujitsu Philippines shall pay to Fujitsu Japan an amount (hereinafter referred to as "Royalty") computed in accordance with the following method: EHScCA Gross amount of the Licensed Products Fujitsu Philippines assembled, manufactured or had a third party assemble or manufacture multiplied by the following rate: Factory Price of Licensed products involved shipped from Fujitsu Philippines x 5.0% However, no Royalty shall accrue for the Licensed Products sold to Fujitsu Japan by Fujitsu Philippines. that Fujitsu Philippines shall pay the Royalty due to Fujitsu Japan within thirty (30) days after the end of each quarter beginning with the quarter ending June 2008. It is also represented that the Agreement shall be in full force and effect from April 1, 2008 to March 31, 2009, subject to extension(s) for successive periods of one (1) year each with the same terms and conditions as therein provided, unless otherwise mutually agreed upon by the parties thereto in writing; and that the issue or transaction 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 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) aDSHIC In view of the foregoing, considering that the Agreement took effect on April 1, 2008 but the subject TTRA was filed only on June 16, 2009, in violation of the 15-day period prescribed under RMO 1-2000, this Office hereby DENIES relief on such payments made before July 1, 2009. Accordingly, said payments made prior to July 1, 2009 shall be subject to income tax at the rate provided 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. . . . (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%)." However, with respect to payments made beginning July 1, 2009 and thereafter, this Office hereby GRANTS relief on such payments pursuant to Article 12 the Philippines-Japan tax treaty, as amended which you invoked, 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: CacISA (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." (Underscoring supplied) In view of all of the foregoing, this Office is of the opinion and so holds that the subject royalty payments by Fujitsu Philippines to Fujitsu Japan under the Memorandum of Agreement are subject to tax at a rate not exceeding 10 percent based on the gross amount of the royalty beginning July 1, 2009. As regards the imposition of the VAT on the royalty fees to Fujitsu Japan , please be informed further that Section 108 of the Tax Code of 1997, as amended by Republic Act No. 9337, provides as follows: "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 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 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 percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). cSATDC xxx xxx xxx '(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; xxx xxx xxx" Thus, in general, the VAT is imposed on the royalty payments made to Fujitsu Japan in the Philippines. On every payment of royalty fees, Fujitsu Philippines is required to withhold such VAT and treat the same as a "passed on" VAT, pursuant to Section 4.110-3 (b) of Revenue Regulations No. 7-95 as amended [now Section 4.114-2 (b) of Revenue Regulations No. 16-05]. However, in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866, February 11, 2005), the Supreme Court held, viz. : "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: EDSHcT . . ., 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. xxx xxx xxx" Such being the case, the payment of royalty fees by Fujitsu Philippines, being a PEZA-registered enterprise, to Fujitsu Japan under the above Agreement should be, as it is hereby confirmed to be, exempt from VAT. 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 effective January 1, 2009. 2. Licensed Products shall mean in-car audio-visual equipment (such as but not limited to tuners, cassette players, CD players, MD players, televisions and composite products of all the foregoing), car navigation systems and automotive-electronic controlling devices and products related to the foregoing.