ITAD BIR Ruling No. 296-14

October 13, 2014 ITAD BIR RULING NO. 296-14 Article 12, Philippines-Japan tax treaty, as amended Isla Lipana & Co. 29th Floor, Philamlife Tower, 8767 Paseo de Roxas, Makati City Attention: Carlos Hilario Mateo Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 27 July 2010, on behalf of your client, Toyota Boshoku Corporation ("Toyota Boshoku-Japan") requesting confirmation that royalties earned by Toyota Boshoku-Japan from Toyota Boshoku Philippines Corporation ("Toyota Boshoku-Philippines") on account of a Technical Assistance Agreement are subject to the preferential tax 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 1 (Philippines-Japan tax treaty). Facts It is represented that Toyota Boshoku-Japan is a corporation organized and existing under the laws of Japan with business address at 1-1 Toyota-cho, Kariya-shi, Aichi-ken, Japan based on the notarized and consularized Residence Certificate issued by the Kariya Tax Office of Japan. The company Toyota Boshoku-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 (SEC) on 28 July 2010. On the other hand, Toyota Boshoku-Philippines is a domestic corporation with business address at 111 Commerce Road, Phase 2, General Industrial Zone, Laguna Technopark, Bian, Laguna 4024. On 10 July 2008, Toyota Boshoku-Japan 2 and Toyota Boshoku-Philippines 3 entered into a Technical Assistance Agreement whereby Toyota Boshoku-Japan agreed to furnish Toyota Boshoku-Philippines technical know-how and information data for the manufacture of Licensed Products 4 such as process planning chart, QC process chart, work instruction sheet, test standards, inspection standards, and any other manufacturing or engineering information which is necessary for the manufacture of the Licensed Products. 5 In return, Toyota Boshoku-Philippines shall pay to Toyota Boshoku-Japan a running royalty equivalent to three percent (3%) of the "Net Selling Price" 6 of the Licensed Products based on the consularized and notarized Technical Assistance Agreement. On 01 April 2009, Toyota Boshoku-Japan and Toyota Boshoku-Philippines amended the Technical Assistance Agreement through an Amendment of the Technical Assistance Agreement. The Royalty Rate in Article 12 of the Technical Assistance Agreement was increased from three percent (3%) to five percent (5%) based on the consularized and notarized Amendment of the Technical Assistance Agreement. ESTCHa 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 notarized Sworn Statement issued by the SGA president of Toyota Boshoku-Philippines on 09 August 2010. Ruling In reply, please be informed that royalties paid to Toyota Boshoku-Japan shall be subject to income tax under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997"), 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: n 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." On the other hand, royalties paid to Toyota Boshoku-Japan are subject to a reduced rate of income tax under Article 12 of the Philippines-Japan tax treaty: IDcAHT "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 Toyota Boshoku-Philippines to Toyota Boshoku-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 pursuant to the provisions of Article 12 (2) (b) of the Philippines-Japan tax treaty. Moreover, the said royalty payments by Toyota Boshoku-Philippines to Toyota Boshoku-Japan shall be subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code, as amended, which provides as follows: cHDEaC "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 , Toyota Boshoku-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 Toyota Boshoku-Japan. In remitting the VAT withheld, Toyota Boshoku-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 Toyota Boshoku-Philippines upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Toyota Boshoku-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, Toyota Boshoku-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 Toyota Boshoku-Japan upon its request and the fourth copy to be retained by Toyota Boshoku-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]. aSCDcH 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 Bureau 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. 2. LICENSOR. 3. LICENSEE. 4. Article 1, Section 2 of the Technical Assistance Agreement. "License Products" means seats and other parts for motor vehicles as listed in Appendix A may from time to time be changed by mutual agreement. 5. Article 3 of the Technical Assistance Agreement. 6. Article 12 of the Technical Assistance Agreement. The "Net Selling Price" shall be LICENSEE's wholesale prices of those Licensed Products minus the following costs and tax, if included therein: (1) all costs for the Supplied Parts and related costs which are incurred until such Supplied Parts have been brought into the factory; (including purchases through trading company or entruster of manufacture of the Licensed Products), (2) all costs of parts, components and materials and related costs for the Licensed Products which are licensed products under the other technical assistance agreement of the LICENSOR and purchased by LICENSEE from such license; (including purchases through trading company or entruster of manufacture of the Licensed Products), and (3) sales tax, excise tax, commodity tax or any other tax of similar nature imposed directly on the sale by LICENSEE of those Licensed Products. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.