ITAD BIR Ruling No. 309-12

August 10, 2012 ITAD BIR RULING NO. 309-12 Article 12 (Royalties) Philippines-Netherlands tax treaty Law Office of A.M. Sison, Jr. and Partners Suite 2002-A, Security Bank Centre 6776 Ayala Avenue Makati City Attention: Atty. Antonio L. Cardio Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on May 18, 2010 requesting confirmation that royalties paid by Sara Lee Philippines, Inc. ("Sara Lee Philippines") to Buttress BV ("Buttress") 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") . Facts Buttress is a foreign corporation and a resident of the Netherlands based on the Declaration of Residence issued by the Tax Administration of Noord in the Netherlands on March 16, 2010. Buttress is located at 100 Vieutensevaart, Utrecht, the Netherlands. It 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 May 7, 2010. On the other hand, Sara Lee Philippines is a domestic corporation located at 24th Floor, Insular Life Corporate Center, Corporate Avenue, Alabang, Muntinlupa City, Philippines. Trademark and Know-How License Agreement On April 22, 2000, Sara Lee Philippines and Buttress entered into a Trademark and Know-How License Agreement where Buttress granted Sara Lee Philippines an exclusive license right to use in the Philippines the relevant know-how and trademarks belonging to Buttress in connection with the manufacture, packing, marketing, selling and distribution of personal care products such as deodorants, hair care products, perfume talc, and baby care products. In consideration, Sara Lee Philippines will pay royalties to Buttress equivalent to 5 percent of its net sales of the products. The royalties are computed quarterly and payable within thirty days after each quarter. The Agreement took effect retroactively on July 26, 1998 and remained in effect for a period of five years. The Agreement was automatically extended for another period of five years. HASDcC The Agreement was amended on April 2, 2001 for the purpose of making the Agreement comply with the provisions of the Intellectual Property Code of the Philippines on third party liability of Buttress with respect to the use of the subject know-how and trademark, and on the tax liability of Buttress on royalties it receives from Sara Lee Philippines . The Agreement was renewed on January 26, 2009 for the purpose of extending its term until July 25, 2013. The amended Agreement complies with the provisions of the Intellectual Property Code on voluntary licensing under Certificate of Compliance No. 5-2009-00012 issued by the Intellectual Property Office on February 5, 2009, valid on July 26, 2008 until July 25, 2013. Trademark License Agreement Also, on July 5, 2000, Sara Lee Philippines and Buttress entered into a Trademark License Agreement where Buttress granted Sara Lee Philippines an exclusive license right to use in the Philippines the relevant trademarks in connection with the manufacture, packing, marketing, selling and distribution of the following personal care products: (1) Block & White , (2) Defiance , (3) Derma Therapy , (4) Dr. Kaufmann , (5) Eskinol, (6) Intensive Series , (7) Master By Eskinol, (8) Matte & Fresh , (9) Purinse , (10) Skinnovation , (11) Skin Reveal, (12) Thalia and (13) White Cross . In consideration, Sara Lee Philippines will pay royalties to Buttress equivalent to 5 percent of its net sales of the products. The royalties are computed quarterly and payable within thirty days after each quarter. The Agreement took effect retroactively on December 23, 1999 and remained in effect for a period of five years. The Agreement was automatically extended for another period of five years. The Agreement was amended on April 2, 2001 for the purpose of making the Agreement comply with the provisions of the Intellectual Property Code of the Philippines on allowing Sara Lee Philippines to sell the products in other countries where Buttress has not given the same or similar license, and on the tax liability of Buttress on royalties it receives from Sara Lee Philippines . The Agreement was renewed on January 26, 2009 for the purpose of extending its term until July 25, 2013. The amended Agreement complies with the provisions of the Intellectual Property Code on voluntary licensing under Certificate of Compliance No. 5-2009-00012 issued by the Intellectual Property Office on February 5, 2009, valid on July 26, 2008 until July 25, 2013. Ruling In reply, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , 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 at least fifteen days before the intended transaction or payment of income, thus: DEScaT "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 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 . CDScaT 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 laid down 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. 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 two Agreements that give rise to the royalties have been in effect since July 26, 1998 and December 23, 1999 , but the TTRA for this purpose was filed only on May 18, 2010 , this Office hereby DENIES relief on all royalties paid by Sara Lee Philippines to Buttress before June 2, 2010 , 1 pursuant to Section III (2) of RMO 1-2000. Accordingly, said royalties 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%)" IcSEAH On the other hand, the royalties paid to Buttress on June 2, 2010 and thereafter are subject to a reduced rate of income tax under Article 12 of the Philippines-Netherlands tax treaty, which provides: " 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. 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." cEISAD 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 Sara Lee Philippines , the payor of the royalties, is not a registered enterprise and engaged in preferred areas of activities in the Philippines, such royalties paid by it to Buttress under the two Agreements, being essentially royalties for the use of know-how and trademark , and made on June 2, 2010 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. Furthermore, under Section 108 (A) of the Tax Code, the said royalties for the use of know-how and trademark 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, 2 raise the rate of value-added tax to twelve percent (12%) . . ." ESTcIA Relative thereto, Sara Lee Philippines shall withhold VAT on the royalties at the rate of 10 percent (before February 1, 2006) and 12 percent (beginning February 1, 2006) before remitting them to Buttress . Sara Lee Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If Sara Lee Philippines is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and the accompanying proof of payment thereof shall serve as documentary substantiation for its claim of input tax on the royalties; otherwise, 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. 3 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. June 2, 2010 is the fifteenth day of filing the TTRA on May 18, 2010 . 2. 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. 3. 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."