ITAD BIR Ruling No. 304-13

November 7, 2013 ITAD BIR RULING NO. 304-13 Article 12 (Royalties), Philippines-Netherlands tax treaty Manabat Delgado Amper & Co. 5th Floor, Salamin Building 197 Salcedo Street, Legaspi Village Makati City Attention: Atty. Nimrod I. Que Assistant Tax Manager Atty. Richard R. Lapres Tax Partner Tax and Corporate Services Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 20, 2011 requesting confirmation that royalties paid by Dimension Data Philippines, Inc. ("Dimension Data Philippines") (formerly Datacraft Philippines, Inc. ) to Dimension Data Nederland BV ("Dimension Data") are subject to income tax at the rate of 15 percent pursuant to the 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 ("Philippines-Netherlands tax treaty") . ESAHca Facts Dimension Data is a foreign corporation and a resident of the Netherlands based on the document issued by the Trade Register of the Chambers of Commerce of the Netherlands on April 19, 2011 and its Declaration of Residence issued by the Tax Administration of Randmeren in the Netherlands on April 19, 2011. Dimension Data is located at 23/25 Veemweg, Barneveld, the Netherlands. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on August 26, 2010. On the other hand, Dimension Data Philippines is a domestic corporation located at Ground Floor, Philamlife Building, 126 L.P. Leviste Street, Salcedo Village, Makati City, Philippines. It is further represented that on November 6, 2010, Dimension Data Philippines and Dimension Data entered into a Sub-License Agreement where Dimension Data granted Dimension Data Philippines a non-exclusive and transferable license (with right to sub-license) to use the intellectual property, know-how, and business system in conjunction with the Global Services Operation Architecture System. The effective date of this Agreement is on October 1, 2009 and shall continue for consecutive periods of one year, unless earlier. The business system includes a series of commercial software, hardware and application integration such as (1) SaaS (Software as a Service) operated on an Oracle database, and an infrastructure of Cisco switches, routers and firewalls, and an EMC Storage Area Network; (2) EMC Corporation Service Assurance Manager; (3) EMC Notification Manager; (4) EMC Voyence Control; (5) Watch4Net, Inc., APG and collectors for EMC SMARTS and ICMP/SNMP; (6) Microsoft Biztalk; (7) VMWare Infrastructure 3; (8) VMWare vCenter; (9) IBM Tivoli Access and Identity Management; and (10) Remote Infrastructure Management computer platform composed of servers and its operating systems. In consideration, Dimension Data Philippines will pay an annual license fee to Dimension Data equivalent to 3.75 percent of its services turnover. Services turnover comprises of Dimension Data Group of Companies' core global services revenue from the resale of non-proprietary product, managed services and professional services offered by the Group's various businesses including Systems Integration, Internet Solutions, Plessey, Express Date across the globe including the America, Asia, Australia, Europe, Middle East and Africa. The license fee for the period October 1, 2008 to September 2009 for fiscal year 2009 will be billed to Dimension Data Philippines and payable not later than March 31, 2010. Thereafter, the license fee will be billed every quarter: October to December, January to March, April to June, and July to September, and payable on agreed payment by the parties. Ruling In reply, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties) ("RMO 72-2010") , which covers income derived or which accrued on November 4, 2010 and thereafter , any availment of 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 before the payment of such income, to wit: " SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. aSDHCT Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis ours) Also, under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , which covers income derived or which accrued before November 4, 2010 , any availment of relief shall be preceded by an application filed at ITAD at least fifteen days before the payment of such income, to wit: " 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) CcSTHI This condition is emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: " However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation . In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same . The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner ." (Emphasis ours) This decision is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. Furthermore, the necessary requirement in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011) . HcACST In view of the foregoing, since the Agreement that gives rise to the license fee has been in effect since October 1, 2009 , but the relevant TTRA was filed only on July 20, 2011 , this Office hereby DENIES relief on license fees paid by Dimension Data Philippines to Dimension Data on or before July 20, 2011 , pursuant to Section 14 of RMO 72-2010 and Section III (2) of RMO 1-2000. Accordingly, said fees shall be subject to income tax at the rate of 30 percent under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, (" Tax Code ") 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: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." On the other hand, license fees paid to Dimension Data on July 21, 2011 and thereafter are subject to relief under Article 12 of the Philippines-Netherlands tax treaty, to wit: "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. cCESaH 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. 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." Under Article 12, royalties arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the royalties are paid by a registered enterprise and engaged in preferred areas of activities in the Philippines, and (b) 15 percent in all other cases. The term royalties 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 (" know-how "). Accordingly, since Dimension Data Philippines is granted a license to use the know-how in conjunction with the Global Services Operation Architecture System, the license fee paid therefor by Dimension Data Philippines to Dimension Data constitutes royalties under paragraph 4, Article 12 of the Philippines-Netherlands tax treaty. The same characterization is envisaged in the following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) , to wit: "11.5 In the particular case of a contract involving the provision, by the supplier, of information concerning computer programming, as a general rule the payment will only be considered to be made in consideration for the provision of such information so as to constitute know-how where it is made to acquire information constituting ideas and principles underlying the program, such as logic, algorithms or programming languages or techniques, where this information is provided under the condition that the customer not disclose it without authorisation and where it is subject to any available trade secret protection." (Page 226) ACTESI This being the case, and since Dimension Data Philippines is not a registered enterprise and engaged in preferred areas of activities in the Philippines, the license fee paid by Dimension Data Philippines to Dimension Data on July 21, 2011 and thereafter shall be subject to income tax at the rate of 15 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Netherlands tax treaty. Finally, under Section 108 (A) of the Tax Code, the said royalties for the use of intangible properties in the Philippines are subject to value-added tax ("VAT"), to wit: "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 selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 1 raise the rate of value-added tax to twelve percent (12%). . ." Relative thereto, Dimension Data Philippines shall withhold VAT on the royalties at the rate of 12 percent before remitting them to Dimension Data . Dimension Data Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Dimension Data Philippines shall use the duly filed BIR Form No. 1600 and its accompanying proof of payment as documentary substantiation for Dimension Data Philippines ' claim of input tax on the royalties; otherwise, it may treat the VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 2 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. aACHDS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate is increased to twelve percent 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. 2. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) , which provides: "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents . xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense', whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made."