ITAD BIR Ruling No. 302-13

November 6, 2013 ITAD BIR RULING NO. 302-13 Article 12, Philippines-Netherlands Tax Treaty SyCip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City, Philippines Attention: Ms. Lucil Q. Vicerra Principal, Tax and Customs Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on August 15, 2012, on behalf of Nike European Operations Netherlands B.V. ("Nike-Netherlands") requesting confirmation that the royalty payments made by Nike Philippines, Inc. ("Nike-Philippines") to Nike-Netherlands are subject to 15 percent pursuant to Article 12 of the Philippines-Netherlands tax treaty . 1 TAIEcS It is represented that Nike-Netherlands , with office address at Colosseum 1, 1213 NL Hilversum, The Netherlands, is a resident of The Netherlands within the meaning of the Philippines-Netherlands tax treaty, based on the Declaration of Residence issued by the Director-General of the Tax and Customs Administration of The Netherlands; that Nike-Netherlands is not registered either as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 29, 2012; on the other hand, Nike-Philippines is a corporation organized and existing under the laws of the Philippines with business address at 10th Floor Marajo Tower, 312 26th Street, West corner 4th Avenue, Bonifacio Global City, 1463, Taguig City. It is further represented that Nike-Philippines and Nike-Netherlands entered into an Intellectual Property License Demand Creation and Retail Sale Agreement ("Creation Agreement") effective as of August 1, 2012 and ends on May 31, 2013 and shall be automatically renewed for an additional one-year term unless either party gives written notice to the other of an intent to terminate; that pursuant to and subject to the condition set in the Creation Agreement, Nike-Netherlands grants to Nike-Philippines the following: a) A non-transferable and exclusive license to use the Licensed Technology 2 and the Licensed Works of Authorship 3 and all associated Intellectual Property Rights in the Licensed Territory 4 to create consumer demand for, and to sell to end consumers through physical locations and on-line channels in the Licensed Territory, Footwear, Apparel, Equipment and Accessories bearing the Licensed Trademarks; and b) A non-transferable and exclusive license to use Licensed Trademarks 5 and all associated Intellectual Property Rights 6 in the Licensed Territory to create consumer demand for, and to sell to end consumers through physical locations and on-line channels in the Licensed Territory, Footwear, Apparel, Equipment and Accessories bearing the Licensed Trademarks. That in consideration for the rights granted under the Creation Agreement, Nike-Netherlands shall pay Nike-Philippines a royalty for each Creation Agreement Month 7 equivalent to 8.75% of the Nike-Philippines ' Net Sales for the Creation Agreement Month immediately preceding the Creation Agreement Month to which the royalty applies. Moreover, it is also represented that on August 1, 2012 an Intellectual Property License Product Manufacturing and Wholesale Distribution Agreement ("Product Agreement") was also entered into by and between Nike-Netherlands and Nike-Philippines to take effect until May 31, 2013 and shall automatically renew for an additional one-year term unless either party gives written notice of an intent to terminate; that pursuant to the Product Agreement, Nike-Netherlands grants Nike-Philippines : 1. A non-transferable, non-exclusive worldwide license to use the Licensed Technology 8 the Licensed Works of Authorship 9 and all associated Intellectual Property Rights 10 to manufacture or have manufactured Licensed Products 11 bearing the Licensed Trademarks, provided that all such Licensed Products are sold by Nike-Philippines only in the Licensed Territory in accordance with the Product Agreement; and cCTaSH 2. A non-transferable and exclusive license to sell to retailers, distributors or other resellers in the Licensed Territory Licensed Products bearing the Licensed Trademarks. That in consideration for Nike-Netherlands ' grant of the right to sell Licensed Products in the Licensed Territory, Nike-Philippines agrees to pay Nike-Netherlands a royalty equal to 3.75% of Nike-Philippines ' Net Wholesale Sales Revenues 12 for each Creation Agreement Month 13 during the Agreement Term; and that based on sworn certification dated October 16, 2012 issued by Nike-Philippines that royalty payments were remitted to Nike-Netherlands on September 19, 2012. Finally, it is also represented that the issue or transaction subject of the above request for ruling is not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal of the taxpayers involved per Sworn Statement issued by Nike-Philippines on June 29, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. 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%). 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: TSacID 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 this particular case, Article 12 of the Philippines-Netherlands tax treaty may apply. It provides, as follows: "Article 12 Royalties 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx 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 cinematograph films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the above-mentioned provisions, royalty payments will be taxed at a preferential rate of 10 percent if the payor is an enterprise registered and engaged in preferred areas of activities in the Philippines, or 15 percent of the gross amount of the royalties in all other cases. ISCaDH Considering that Nike-Philippines is not a Board of Investments (BOI)-registered enterprise engaged in preferred areas of activities in the Philippines, this Office is of the opinion and so holds that the royalty payments made by Nike-Philippines to Nike-Netherlands under the Creation Agreement and Product Agreement are subject to the preferential tax rate of 15 percent of the gross amount of royalties pursuant to Article 12 (2) (b) of the Philippines-Netherlands tax treaty. Moreover, as provided in Section 108 of the Tax Code of 1997, as amended, the said royalty payments are subject to value-added tax (VAT), thus: "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%) 14 of gross receipts derived from the sale or exchange of services, including the use or lease of properties: xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" Accordingly, Nike-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 Nike-Netherlands .In remitting the VAT withheld, Nike-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 Nike-Philippines upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Nike-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, Nike-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 Nike-Netherlands upon its request and the fourth copy to be retained by Nike-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] 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. aIHSEc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. 2. "Licensed Technology" means any invention, idea, development, design, specification, concept, process, method, algorithm, formula, technique, know-how or other discovery, whether or not patented or patentable, that (i) Licensor owns or has licensed from a third party or creates, develops, acquires or licenses in the future, and (ii) relates to or is useful in connection with creating demand for or retail sale of Footwear, Apparel, Equipment or Accessories bearing the Licensed Trademarks. Licensed Technology includes, without limitations, inventions and design concepts relating to retail store layouts, software programming concepts and configurations relating to in-store kiosks or on-line presentation of product images or information, and confidential business methods relating to consumer online "mass customization" of Footwear, Apparel, Equipment or Accessories. 3. "Licensed Work(s) of Authorship" means all Work of Authorship that (i) that are owned by Licensor in the Licensed Territory and/or licensed to Licensor for use in the Licensed Territory and (ii) related to or are useful in connection with creating demand for or retail sale of Footwear, Apparel, Equipment or Accessories bearing the Licensed Trademarks, including any such Works of Authorship acquired, created or licensed by Licensor after the date of this Agreement. Licensed Works of Authorship include, without limitations, advertising copy and graphic content for Licensor's global or regional advertising campaigns, graphics for in-store or on-line product displays, images of athletes, teams and coaches who endorsee Footwear, Apparel, Equipment or Accessories bearing the Licensed Trademarks, images of fictional characters and avatars, software programs relating to demand creation or retail sales, musical composition and sound recording intended for in-store or on-line retail environments and any written materials relating to market studies, demand creation plans, or the like. 4. "Licensed Territory" means those countries, territories and regions of the world listed on Exhibit A. 5. "Licensed Trademarks" means: (a) all trademarks that are owned by or licensed to Licensor for use in the Licensed Territory (other than the trademarks associated with the Manschester United Football Club and Confederacao Brasileira de Futebol which are the subject of a separate agreement) and are either (i) associated with the NIKE, NIKE Golf, SPARQ or Jordan brands, including but not limited to the NIKE name, the Swoosh design, the composite Nike/Swoosh design, the NIKE Golf Logo, the SPARQ name, and the Jumpman design, or (ii) approved by the Licensor or its licensors for use in the Licensed Territory; and (b) any other trademarks described in (a) (i) or (ii) above that are acquired, created or licensed by Licensor after the date of this Agreement. 6. "Intellectual Property Rights" means all intellectual property rights commonly referred to as such under applicable law, including without limitation patent rights associated with methods of demand creation or retail sale, copyrights, moral rights, trademark rights, trade name rights, service mark rights, trade dress rights, trade secret rights, proprietary rights, privacy rights, and publicity rights, whether or not those rights have been filed for or registered under any statute, rule, regulation or other laws. 7. "Agreement Month" means the period commencing on the Effective Date and ending on August 31, 2012, and each succeeding one-month period thereafter during the Agreement Term. 8. "Licensed Technology" means any invention, idea, development, design, pattern, specification, prototype, concept, process, method, algorithm, formula, technique, know-how or other discovery, whether or not patented or patentable, that (i) Licensor owns or has licensed from a third party, or creates, develops acquires or licenses in the future, and (ii) relates to or is useful in connection with the manufacture of Licensed Products. 9. "Licensed Work(s) of Authorship" means all Work of Authorship that (i) that are owned by Licensor in the Licensed Territory and/or licensed to Licensor for use in the Licensed Territory and (ii) related to or are useful in connection with the manufacture of Licensed Products, including without limitation tech packages, graphic product designs, technical specifications, bills of materials, supplier lists, process or workflow diagrams, costing templates, and product images, and any other such Works of Authorship acquired, created or licensed by Licensor after the date or this Agreement. 10. "Intellectual Property Rights" means all intellectual property rights commonly referred to as such under applicable law, including without limitation patent rights, copyrights, moral rights, trademark rights, trade name rights, service mark rights, trade dress rights, trade secret rights, privacy rights, and publicity rights, whether or not those rights have been filed for or registered under any statute, rule regulation or other law. 11. "Licensed Products" means (i) Accessories, (ii) Apparel, (iii) Equipment, (iv) Footwear, and (v) Other Products. 12. "New Wholesales Sales Revenues" means the gross sales price Licensee actually invoices a retailer, distributor or other reseller (including a Licensee affiliate engaged in retail sales to consumers) for Licensed Products, less all trade discounts, cash discounts, chargebacks or merchandise return credits or allowances relating to Licensed Products, and less all freight, insurance, duties, taxes and packaging and distribution charges if separately stated in the invoice; provided, however, that in the case of deliveries of Licensed Products for no money consideration ( e.g., for charitable or promotional purposes) the New Wholesale Sales Revenues shall be deemed to be zero. 13. "Agreement Month" means the period commencing on the Effective Date and ending on August 31, 2012, and each succeeding one-month period thereafter during the Agreement Term. 14. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.