ITAD BIR Ruling No. 305-13

November 7, 2013 ITAD BIR RULING NO. 305-13 Article 12, Philippines-Switzerland tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Maria Carmelita V. Torres Manager, Tax Gentlemen : This refers to your tax treaty relief application filed on February 5, 2013 requesting confirmation that the franchise fee payments made by Holcim Philippines, Inc. ("Holcim PH") to Holcim Technology Ltd. ("Holcim CH") are subject to preferential tax rate of 15 percent pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . CDHAcI It is represented that Holcim CH is a resident of Switzerland with address at Zurcherstrasse 156 CH 8645 Jona, based on the Certificate of Fiscal Residence dated January 29, 2013, issued by the tax authority of Switzerland; that Holcim CH is not registered 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 dated January 25, 2013; and that on the other hand, Holcim PH is a domestic corporation with address at 7th Floor, Two World Square, McKinley Hill, Fort Bonifacio, Taguig City. It is further represented that on September 19, 2012, Holcim CH and Holcim PH entered into a Franchising Agreement ("Agreement") whereby Holcim CH granted Holcim PH a non-exclusive right to use the Business Concept which is a bundle of inseparably linked intangible rights and intangible property which, when used all together in the manner in which it has been done directly or indirectly by Holcim CH in the past, results in a precise and defined business operation model, within the Philippines for the operation of Holcim PH' s business; that such Business Concept shall include the trademarks and other registered and unregistered marketing intellectual property rights, technology and know-how; that for and in consideration of said license, Holcim PH shall pay Holcim CH a franchise fee to be calculated in accordance with the following formula: Franchise Fee = Net Sales * Franchise Rate that the effective date of the Agreement shall be on January 1, 2013 and shall remain in force until terminated; and that the first payment was made on May 7, 2013 based on the Certification issued by Standard Chartered Bank on May 11, 2013. It is finally represented that the subject income payments are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal based on the Certification issued by Holcim PH on January 25, 2013. In reply, please be informed that royalties payable to a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at a rate of 30 percent Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides: "SEC. 28. Rate of Income Tax on Foreign Corporations . . . . (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%)." IHaECA However, such royalties may be exempt or subject to a reduced rate to the extent required by any treaty obligation on the Philippines. Section 32 (B) (5) of the Code provides: "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: (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, you invoke the Philippines-Switzerland tax treaty. With respect to royalties, Paragraphs 1, 2, and 3 Article 12 thereof provide: "Article 12 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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. 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 and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." HTCDcS Under tax treaties, payments for the supply of services are treated as business profits, unless they are otherwise treated as royalties when they concern the use of know-how or any other intangible property (copyright, patent, trademark, design or model, plan, secret formula or process design). To distinguish between payments for the supply of services and payments for know-how, the following commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 2010) mention: "11.1. In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7. 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: Contracts for the supply of know-how concern information of that kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information . In the case of contracts for the provision of services , the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party. EIASDT 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. 11.4. Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include: payments obtained as consideration for after-sales service, payments for services rendered by a seller to the purchaser under a warranty, payments for pure technical assistance, payments for a list of potential customers, when such a list is developed specifically for the payer out of generally available information (a payment for the confidential list of customers to which the payee has provided a particular product or service would, however, constitute a payment for know-how as it would relate to the commercial experience of the payee in dealing with these customers), payments for an opinion given by an engineer, an advocate or an accountant, and payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software with non-confidential information in response to frequently asked questions or common problems that arise frequently." (Pages 225-226) HSCcTD In this case, payments under the Agreement concern information of that kind described in paragraph 11 quoted above which already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information and that there would generally be very little more which needs to be done by Holcim CH under the Agreement other than to supply existing information or reproduce existing material and will not involve a very much greater level of expenditure by Holcim PH in order to perform his contractual obligations. Under paragraph 2 of Article 12 of the Philippines-Switzerland tax treaty, royalties arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed 15 percent of the gross amount of the royalties. Under paragraph 3 of Article 12, 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 and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Accordingly, the franchise fees made by Holcim PH to Holcim CH under the Agreement shall be subject to 15 percent of the gross amount of the royalties based on paragraph 2 of Article 12 of the Philippines-Switzerland tax treaty. Furthermore, the royalty payments made by Holcim PH are subject to the 12% value-added tax (VAT) pursuant to Section 108 of the National Internal Revenue Code of 1997, as amended. Accordingly, Holcim PH, being the payor in control of the payment shall be responsible for the withholding of VAT on the said royalty payments on behalf of Holcim CH by filing a separate VAT return for and on behalf of Holcim CH using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from Holcim PH, if it is a VAT registered taxpayer. In case Holcim PH is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, Holcim PH is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Holcim CH upon its request, and the fourth copy to be retained by Holcim PH as its 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) ] 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. TaHDAS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue