ITAD BIR Ruling No. 297-14

October 13, 2014 ITAD BIR RULING NO. 297-14 Article 11, Philippines-United Kingdom tax treaty Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero St., Salcedo Village, 1227 Makati City, Philippines Attention: Maria Victoria D. Sarmiento Alvin O. Gelf Abigail D. See Gentlemen : This refers to your application for tax treaty relief application (TTRA) filed on 23 July 2010, requesting confirmation that royalty payments by Reckitt Benckiser Healthcare Philippines, Inc. ("RB Philippines") to Reckitt Benckiser Healthcare International Limited ("RB International") is subject to preferential tax rate of twenty-five percent (25%) pursuant to Article 11 of The Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-United Kingdom tax treaty"). Facts It is represented that RB International is a foreign corporation organized and existing under the laws of England and Wales with principal office address at 103-105 Bath Road, Slough, SL1 3UH, United Kingdom; and that, on the other hand, RB Philippines is duly organized and existing under the laws of the Philippines, situated at 22nd Floor, Equitable Bank Tower, 8751 Paseo de Roxas, Makati City. It is further represented that RB International is not registered as a corporation or partnership in the Philippines based on the Certificate issued by the Securities and Exchange Commission (SEC) on 02 December 2008. It is further represented that RB International and RB Philippines entered into a License Agreement, effective 01 January 2007, 1 whereby RB International as licensor, granted RB Philippines, as licensee, the right to use the Intellectual Property Rights defined therein, 2 for the production, sale, distribution and marketing of the Products also defined in the said License Agreement. 3 ECaAHS It is further represented that the calculation of the amount of royalties due shall be made at the end of each calendar quarter. The Licensee shall send a complete statement by the 20th of the month following a calendar quarter and shall transfer the corresponding amount within the same period. 4 It is further represented that RB Philippines paid the royalties to RB International by S.W.I.F.T. through Citibank with the following information: Date of Payment Amount Paid Reference (Debit Note No.) May 20, 2010 Php2,039,466.97 501/01305 October 28, 2010 Php7,850,121.76 501/013766 501/014688 January 27, 2011 Php14,526,223 501/015198 March 28, 2011 Php3,995,355.60 501/015562 501/0145412 It is finally represented that the transactions subject of this ruling are not subject of 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 corporate secretary of RB Philippines executed on 26 July 2010. Ruling A. On Income Tax In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, the royalty payments to RB International are subject to income tax at the rate of 30 percent, thus: " 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 percent (30%) 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 (Emphasis ours) SHCaEA However, under Section 32 (B) (5) of the Tax Code, such royalty payments 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." With respect to a treaty, RB International invoked the Philippines-United Kingdom tax treaty, paragraphs 1 and 2 of Article 11 thereof provides: "Article 11 Royalties 1. Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films or tapes for television or radio broadcasting. b) in all other cases, 25 per cent of the gross amount of the royalties. DHcEAa Accordingly, since RB International does not fall under Article 11 (2) (a) (i) and (ii), the royalty payments is subject to preferential tax rate of twenty-five percent (25%) pursuant to the Philippines-United Kingdom tax treaty. B. On Value added tax: Moreover, the said royalty payments by RB Philippines to RB International shall be subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code, as amended, which 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 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, RB 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 RB International. 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. CDaSAE Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue Footnotes 1. Article 1 (1.1) (Interpretation) of the License Agreement. 2. Ibid. 3. Ibid. 4. Article 7 (7.1) (Payment) of the License Agreement. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.