ITAD BIR Ruling No. 275-13

September 20, 2013 ITAD BIR RULING NO. 275-13 Article 12 (Royalties), Philippines-Japan tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Luis Jose P. Ferrer Authorized Representative Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on 08 February 2013 requesting confirmation that royalties paid by Yakult Philippines, Inc. ("Yakult-Philippines") to Yakult Honsha Co. Ltd. ("Yakult-Japan") 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, as amended ("Philippines-Japan tax treaty") . Facts It is represented that Yakult-Japan is a corporation organized and existing under the laws of Japan with business address at 1-19 Higashi Shinbashi, 1-chome, Minato-ku, Tokyo, Japan based on the notarized and consularized Certificate of Status of Taxable Person Ministry of Foreign Affairs of Japan and is engaged in the business of manufacturing, selling, importing and exporting of fermented milk drink and dairy products, among other things based on the notarized and consularized Articles of Incorporation of Yakult-Japan .The company Yakult-Japan is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on 21 June 2012. On the other hand, Yakult-Philippines is a domestic corporation with business address at 1461 Agoncillo corner Escoda Streets, Ermita, Manila. The Firm of Sycip Gorres & Velayo is authorized by Yakult-Japan for the purpose of applying for this tax treaty relief based on the notarized and consularized Special Power of Attorney executed by the President of Yakult-Japan . cAaDCE Yakult-Japan and Yakult-Philippines entered into a Technical Assistance, Patent and Trademark License Agreement ("License Agreement") whereby Yakult-Japan agreed to furnish Yakult-Philippines (a) certain technical information and technical assistance, (b) certain patents, and (c) certain trademarks 1 from 14 January 2013 to 13 January 2018. In return, Yakult-Philippines shall pay to Yakult-Japan 1 and 1/2% of the Net Sales Price of all products manufactured by Yakult-Philippines during the term of the License Agreement, plus a bonus royalty of 2% of the Net Foreign Exchange Earnings 2 based on the notarized and consularized Technical Assistance, Patent and Trademark License Agreement executed by Yakult-Japan and Yakult-Philippines . As per Certification issued by Mizuho Corporate Bank, Ltd.-Manila Branch, Yakult-Philippines made a remittance of One Hundred Seventy Two Thousand Six Hundred Eighty Two US Dollars and Sixty One Cents (US$172,682.61) in favor of Yakult-Japan for payment of royalties on 28 May 2013. It is finally represented that the royalties subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the President of Yakult-Philippines on 07 February 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") ,as amended, royalty payments made to Yakult-Japan are subject to income tax at the rate of 30 percent, thus: HaTSDA "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%)." However, under Section 32 (B) (5) of the NIRC of 1997, these royalties may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: 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." acHDTE For this purpose, you invoke the Philippines-Japan tax treaty, as amended. Article 12, thereof provides: "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) 10 per cent of the gross amount of the royalties in all other cases." Based on the foregoing, royalty payments made by a Philippine enterprise to a Japanese enterprise may be subject to the preferential tax rate of (i) 15% of the gross amount of royalties if the royalties are paid in respect to the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; or (ii) 10% of the gross amount of royalties in other cases. It appearing that the gross amount of royalties to be paid by Yakult-Philippines to Yakult-Japan is not for the use of cinematograph films and films or tapes for radio or television broadcasting, such royalty payments are subject to the preferential rate of 10% of the gross amount of royalties. Moreover, the said royalty payments by Yakult-Philippines to Yakult-Japan shall be subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code, as amended, which provides as follows: CDTSEI "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 the 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: xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds or services in the Philippines for others for a fee, remuneration or consideration, including ....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; xxx xxx xxx" Accordingly, Yakult-Philippines ,being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT on such royalty before making any payment to Yakult-Japan .In remitting the VAT withheld, Yakult-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Yakult-Philippines upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Yakult-Philippines is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of goods or properties purchased which may be treated as an "expense" or as an "asset",whichever is applicable. In addition, Yakult-Philippines is required to issue the Certificate of Final Income Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Yakult-Japan upon its request and the fourth copy to be retained by Yakult-Philippines as its file copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07); [Section 4.114 (d), as amended by RR 28-03]. AIHDcC 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. Page 1 of the License Agreement. 2. Section 6.01 of the License Agreement.