ITAD BIR Ruling No. 305-12

July 30, 2012 ITAD BIR RULING NO. 305-12 Article 12 (Royalties), Philippines-Thailand tax treaty Salvador and Associates Attorneys-at-Law 815-816 Tower One and Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Euney Marie J. Mata-Perez Mary Rose V. Pascual Reizel Ann A. Tanchico Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 13, 2011, requesting confirmation that fees made by Lyceum of the Philippines University ("Lyceum") , Lyceum of the Philippines University-Batangas ("Lyceum-Batangas") and Lyceum of the Philippines University-Laguna ("Lyceum-Laguna") (collectively, the "Lyceum Group" ) to Dusit Thani Public Company Ltd. ("Dusit Thani") are subject to preferential treatment pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Thailand tax treaty") . Facts Dusit Thani is a corporation organized and existing under the laws of Thailand and is a resident thereof based on its Articles of Association and on the Certificate of Residence issued by the Revenue Department of Thailand on September 10, 2010. Dusit Thani is situated at 946 Dusit Thani Building, 5th Floor, Rama IV Road, Silom, Bangrak, Bangkok, Thailand. Dusit Thani 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 November 18, 2010. On the other hand, Lyceum, Lyceum-Batangas and Lyceum-Laguna are privately-owned higher educational institutions in the Philippines. Lyceum is situated at Muralla Street, Intramuros, Manila; Lyceum-Batangas at Capitol Site, Batangas City, Batangas; and Lyceum-Laguna at Kilometer 54 National Highway, Makiling, Calamba City, Laguna, all in the Philippines. Licensing Agreement On December 3, 2008, Lyceum, Lyceum-Batangas and Lyceum-Laguna (collectively, the Lyceum Group ) and Dusit Thani entered into a Licensing Agreement where Dusit Thani granted the Lyceum Group the right to use the Trademarks, the Dusit Thani Brand, the Know-how and the Course Curricula. Trademarks means registered trademarks and other trademarks which Dusit Thani may authorize to be used in relation to the Agreement, including the trademark 'Dusit Thani College' and other related marks in Thailand and the Philippines in respect of a number of classes of goods and services. Dusit Thani College is a privately-owned higher educational institution in Thailand which offers various bachelor degree programs in kitchen and restaurant management, hotel management, tourism management, and variety of short courses. Know-how means know-how belonging to Dusit Thani or its affiliates which will be made available to the Lyceum Group to assist it in carrying its activities pursuant to the Agreement including teaching techniques for food and beverage services, housekeeping operations, bartending operations, culinary arts, lesson planning techniques, assessment techniques, design and plan of facilities, practical kitchen, demonstration kitchen, practical restaurant and bar and related facilities. Course Curricula means curricula for the courses administered by the Lyceum Group and Dusit Thani as conducted in English and which are bachelor courses in hotel and restaurant management, tourism management, culinary arts and restaurant management, cruise line, and all short or intensive courses introduced by Dusit Thani or using its course materials. The Lyceum Group has tied up with Dusit Thani for a joint program for the courses in order for Lyceum Group graduates to be more globally competitive and immediately employable by Dusit Thani and other international hotel chains, cruise lines and key players in the hospitality industry. The courses to be formally offered by the Lyceum Group under the joint program are as follows: ATCaDE 1. Bachelor of Science in International Hospitality Management Specializing in Hotel and Restaurant Administration; 2. Bachelor of Science in International Hospitality Management Specializing in Culinary Arts and Kitchen Operation; 3. Bachelor of Science in International Hospitality Management Specializing in Cruise Line Operation in Hotel Services; 4. Bachelor of Science in International Hospitality Management Specializing in Cruise Line Operations in Culinary Arts; 5. Bachelor of Science in International Travel and Tourism Management; 6. Associate Degree in International Hospitality Management Specializing in Hotel and Restaurant Administration; 7. Associate Degree in International Hospitality Management Specializing in Culinary Arts and Kitchen Operations; and 8. Associate Degree in International Travel and Tourism Management. In consideration, the Lyceum Group will pay a licensing fee to Dusit Thani equivalent to one percent of all tuition fees received by the Lyceum Group arising from the enrollment in the courses excluding any miscellaneous fees such as laboratory fees and consumable fees if charged separately from the tuition fees. The fee is payable within 30 days after the close of each semester and summer term and will be paid in equivalent United States dollars by bank transfer. The fee will be based on all freshmen students who enrolled in the courses beginning the first semester of the academic year 2009-2010. The Agreement took effect on December 3, 2008 and will be in effect for fifteen years from the first academic year. Both parties will review the accomplishment of the courses after every five years to ensure that both have mutually benefitted from the collaboration. Consulting Agreement On December 3, 2008, the Lyceum Group and Dusit Thani likewise entered into a Consulting Agreement where Dusit Thani agreed to provide advice on the facilities and space requirement and comments on technical services related to the courses to be offered by the Lyceum Group under the Licensing Agreement. The provision of advice will be done only through person-to-person on-site teaching including the use of approved audio-visual materials. The provision of advice will not be done remotely such as video-conferencing, internet, correspondence courses and any electronic and other means of sound or image transmission. Dusit Thani will assist the Lyceum Group in the marketing and sales of the courses through Dusit Thani' s own and affiliated sources, including the featuring of the courses in relevant prospectuses, brochures and other marketing materials in paper or electronic form, and the promotion of the courses at appropriate exhibitions, fairs and similar events attended by Dusit Thani. Dusit Thani will also appoint a representative from Dusit Thani College who will be a consultant to the Lyceum Group in relation to the administration of the courses. Dusit Thani will not charge the Lyceum Group of any fee on the said consultant but the Lyceum Group will provide accommodation and meals to the consultant in its in-campus training hotel laundry. In consideration, the Lyceum Group will pay a consulting fee to Dusit Thani equivalent to four percent of all tuition fees received by the Lyceum Group arising from the enrollment in the said courses excluding any miscellaneous fees such as laboratory fees and consumable fees if charged separately from the tuition fees. The fee is payable within 30 days after the close of each semester and summer term and will be paid in equivalent United States dollars by bank transfer. The fee will be based on all freshmen students who enrolled in the courses beginning the first semester of the academic year 2009-2010. The Agreement took effect on December 3, 2008 and will be in effect for fifteen years from the first academic year. Both parties will review the accomplishment of the courses after every five years to ensure that both have mutually benefitted from the collaboration. Based on the Certification issued by the Project Director of Lyceum on December 6, 2010, the consultant from Dusit Thani College will stay in the Philippines for an aggregate period not exceeding thirty days in any given year. DIAcTE 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 tax treaty 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 first taxable event subject of the TTRA, to wit: "Section 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. 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 15 days before the intended transaction or payment of 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) This condition was 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) HDTISa This decision was upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated 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) . In view of the foregoing, since the subject TTRA was filed on July 13, 2011, and the Licensing Agreement and the Consulting Agreement that give rise to the payment of licensing fee and consulting fee took effect on December 3, 2008, this Office hereby DENIES relief on those fees paid by the Lyceum Group to Dusit Thani on and before the filing of the TTRA on July 13, 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 under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , 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: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." On the other hand, the fees paid to Dusit Thani on July 14, 2011 and thereafter are subject to relief under paragraphs 1, 2 and 3, Article 13 of the Philippines-Thailand tax treaty, to wit: "Article 13 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting 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) 15 per cent of the gross amount of the royalties if the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; or (ii) by an enterprise under the promotion of the Board of Investments of Thailand; or (iii) in respect of cinematographic films or tapes for television or broadcasting; b) 25 per cent of the gross amount of the royalties in all other cases. 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 cinematographic films or tapes for television or broadcasting, any patent, trade mark, 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 paragraphs 1 and 2 above, royalties arising in the Philippines and paid to a resident of Thailand may be taxed in the Philippines at a rate not to exceed: (a) 15 percent if the royalties are paid by an enterprise registered with the Board of Investments and engaged in preferred areas of activities, or if the royalties are paid in respect of cinematographic films or tapes for television or broadcasting; and (b) 25 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 cinematographic films or tapes for television or broadcasting, any patent, trade mark, 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") . HETDAa Accordingly, with respect to the licensing fee for the use of the Trademarks, the Dusit Thani Brand, the Know-how and the Course Curricula as defined in the Licensing Agreement, this fee constitutes payments or royalties for the use of trademark (the Trademarks and the Dusit Thani Brand), know-how (the Know-how) and copyright of literary, artistic or scientific work (Course Curricula). With respect to the consulting fee , while this fee is given for the provision of advice and technical services related to the courses offered by the Lyceum Group under the Consulting Agreement, we also consider this fee as royalties and not payment for the provision of services. The following facts are worth considering: 1. Under the Consulting Agreement, the provision of advice by Dusit Thani to the Lyceum Group will be done only through person-to-person on-site teaching including the use of approved audio-visual materials. The provision of advice will not be done remotely such as video-conferencing, internet, correspondence courses and any electronic and other means of sound or image transmission. 2. The provision of advice and other technical services will be done by a consultant appointed by Dusit Thani and who will come from Dusit Thani College. The consultant will not stay in the Philippines for an aggregate period not exceeding thirty days in any given year. Dusit Thani will not charge the Lyceum Group of any fee on the said consultant but the Lyceum Group will provide accommodation and meals to the consultant in its in-campus training hotel laundry. 3. Although no fee is attributed to the consultant, Dusit Thani will nonetheless charge the Lyceum Group of a consulting fee equivalent to four percent of all tuition fees received by the Lyceum Group arising from the enrollment in the said courses subject of the Licensing Agreement and the Consulting Agreement. 4. The consulting fee of four percent is higher than the licensing fee of one percent under the Licensing Agreement. This discrepancy is not reasonable taking into account that in the Consulting Agreement, Dusit Thani (through the consultant from Dusit Thani College ) will render services to the Lyceum Group for a period of not more than an aggregate of thirty days within any calendar year but will receive a significant amount (four percent) from the revenues collected by the Lyceum Group. On the other hand, in the Licensing Agreement, Dusit Thani permitted the Lyceum Group to use a number of intangible properties (the Trademarks, the Dusit Thani Brand, the Know-how and the Course Curricula) but will receive a small amount (one percent) from such revenues. Generally, a contract for the provision of services involves a very much greater level of expenditure by the supplier in order to perform his contractual obligations, such as salaries and wages for employees involved in the activity, as mentioned in the following commentaries of the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital (Condensed Version, July 22, 2010) , to wit: "11.3 The need to distinguish these two types of payments, i.e., payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction: xxx xxx xxx In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services. " (Pages 225-226) (Emphasis ours) Under the Consulting Agreement, since it was not shown on the contrary that Dusit Thani will incur a greater level of expenditure in order to perform its contractual obligations to the Lyceum Group on account that the consultant who will provide services to the Lyceum Group will not stay in the Philippines for not more than an aggregate of thirty days within any given year, the consulting fee paid for this purpose cannot constitute as mere payment for services but as royalties. Accordingly, since the Lyceum Group, the payor of the royalties, is not registered with the Board of Investments and engaged in preferred areas of activities, and since the royalties are not paid in respect of cinematographic films or tapes for television or broadcasting, the licensing fee and the consulting fee paid by the Lyceum Group to Dusit Thani and made on July 14, 2011 and thereafter shall be subject to income tax at the rate of 25 percent, pursuant to paragraph 2 (b), Article 13 of the Philippines-Thailand tax treaty. Finally, under Section 108 (A) of the Tax Code, the fees in question, being payments for the lease of intangible property (trademark, know-how and copyright) and the provision of services in the Philippines, are subject to value-added tax ("VAT"), to wit: acCTIS "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: 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, the Lyceum Group shall withhold VAT on the fees at the rate of 12 percent before remitting them to Dusit Thani. The Lyceum Group shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form and its accompanying proof of payment shall serve as documentary substantiation for the Lyceum Group 's claim of input tax on the fees. Otherwise, if the Lyceum Group is not a VAT-registered taxpayer, it may treat such 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent beginning 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."