ITAD BIR Ruling No. 314-14

November 11, 2014 ITAD BIR RULING NO. 314-14 Articles 5 and 7, Philippines-New Zealand tax treaty Asian Hospital, Inc. 2205 Civic Drive Filinvest Corporate City Alabang, Muntinlupa City Attention: Alexander Cambaling Tax Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on December 5, 2012, on behalf of Orion Health Limited ("OHL"), requesting confirmation that the royalties paid to OHL by Asian Hospital, Inc. ("AHI") are subject to 15 percent preferential final withholding tax rate pursuant to Article 12 of the Convention between the Republic of the Philippines and the Government of New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-New Zealand tax treaty"). It is represented that OHL is a corporation organized and existing under the laws of New Zealand with principal address at Corner of Mary and Enfield Streets, Mt. Eden, 1024, Auckland, New Zealand, and is a resident of New Zealand for tax purposes based on the Certificate of Status of Enterprise issued on September 1, 2012 by the Inland Revenue of New Zealand; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated August 24, 2012; and that, on the other hand, AHI is a corporation organized and existing under the laws of the Philippines, with principal address at 2205 Civic Drive, Filinvest Corporate City, Alabang, Muntinlupa City. It is further represented that on April 18, 2012, OHL and AHI entered into a License, Support and Implement Agreement ("Agreement") whereby OHL grants to AHI a perpetual, non-exclusive, non-transferable fee-bearing right and license (without the right to sublicense) to use the Software (Orion Health Hospital Information System V6.0 sp4) and related materials provided by OHL solely in object-code form for AHI's internal business use in accordance with the Software Configuration Restrictions set out in the Agreement; that in consideration thereof, AHI agreed to pay OHL the License Fees, the Support Fees, and the Implementation Fees specified in the Agreement plus any applicable value-added tax (VAT) other taxes or duties within 30 days of receipts of an invoice from OHL and in accordance with the commercial terms agreed upon; and that, based on the telegraphic transfer from the Bank of the Philippine Islands, royalty payment amounting to USD97,650.00 was made by AHI to OHL on December 27, 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, to royalties derived in the Philippines by a nonresident foreign corporation. It provides: IacHAE "Section 28. Rates 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." Also, 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: 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." EaScHT However, please be informed that Revenue Memorandum Circular (RMC) No. 44-2005 treats software payments either as business income, royalties, rental income, or capital gains, depending on the nature of the transaction out of which such payments are made. It provides: "Section 5. Characterization of Transactions. The character of payments received in a transaction, involving the transfer of computer software depends on the nature of the rights that the transferee acquires under the particular arrangement regarding the use and exploitation of the program. a. Transfer of copyright rights. A transfer of software is classified as a transfer of a copyright right if, as a result of the transaction, a person acquires any one or more of the rights described below: i. The right to make copies of the software for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending; acAIES ii. The right to prepare derivative computer programs based upon the copyrighted software; iii. The right to make a public performance of the software; iv. The right to publicly display the computer program; or v. any other rights of the copyright owner, the exercise of which by another without his authority shall constitute infringement of said copyright. The determination of whether a transfer of a copyright right in a software is a sale or exchange of property is made on the basis of whether, taking into account all facts and circumstances, there has been a transfer of all substantial rights in the copyright. A transaction that does not constitute a sale or exchange because not all substantial rights have been transferred will be classified as a license generating royalty income. When only copyright rights are transferred, payments made in consideration therefor are royalties. On the other hand, when copyright ownership is transferred, payments made in consideration therefor are business income. b. Transfer of copyrighted articles. A copyrighted article incorporating a software includes a copy of the software from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. The copy of the software may be fixed in the magnetic medium of a floppy disk or a CD-ROM, or in the main memory or hard drive of a computer, or in any other medium. If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income. caCEDA xxx xxx xxx" The fact that what is being transferred to AHI is only a perpetual, non-exclusive, non-transferable fee-bearing right and license (without the right to sublicense) to use the Software and there was no transfer of ownership thereto including pertinent rights protected under relevant intellectual property laws, Revenue Memorandum Circular (RMC) 44-2005, Section 5b thereof, will apply in this case which states that, "If a person acquires a copy of a software but does not acquire any of the rights described above (or only acquires a de minimis grant of such rights), and the transaction does not involve the provision of services or of know-how, the transfer of the copy of the software is classified solely as a transfer of a copyrighted article and payments for which constitute business income." Thus, payment made by AHI to OHL, being business income (or business profits), are subject to income tax in the Philippines only if the income is attributable to a permanent establishment which OHL has in the Philippines, under paragraph 1, Article 7, of Philippines-New Zealand tax treaty, to wit: "Article 7 Business Profits 1. The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them as is attributable to a) that permanent establishment; or b) sales within that other Contracting State of goods or merchandise of the same or a similar kind as those being sold, or other business activities of the same or a similar kind as those being carried on through that permanent establishment if the sale or the business activities had been made or carried on in that way with a view to avoiding taxation in that other State. Based on paragraph 1, the profits of an enterprise of New Zealand shall be taxable only in New Zealand unless the enterprise carries on business in the Philippines through (a) a permanent establishment situated therein; and (b) sales within the Philippines of goods or merchandise of the same or a similar kind as those being sold, or other business activities of the same or a similar kind as those being carried on through that permanent establishment if the sale or the business activities had been made or carried on in that way with a view to avoiding taxation in New Zealand. Relative thereto, Article 5 of the same treaty, a permanent establishment is defined as follows: "Article 5 Permanent Establishment 2. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. CaEATI 3. The term "permanent establishment" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) a place of exploration of natural resources; h) a building site or construction, installation or assembly project, or supervisory activities in connection therewith where such site, project or activity continues for more than six months; i) premises used as a sales outlet; j) a warehouse, in relation to a person providing storage mainly for some other person or persons; k) a place for the furnishing of services, including consultancy services by an enterprise through employees or other personnel where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 183 days within any twelve month period." Based on the foregoing paragraphs, OHL is deemed to have a permanent establishment if it has a fixed place of business in the Philippines through which its business is wholly or partly carried on, such as, a store or other sales outlet, a branch, an office, a factory, a workshop, and a warehouse, or if it undertakes activities relating to a mine, an oil or gas well, a quarry or other place of extraction of natural resources, or a building site or construction or installation which continues for more than six months, or a place for the furnishing of services, including consultancy services by an enterprise through employees or other personnel where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than 183 days within any twelve month period. acIASE Accordingly, since OHL is not engaged in trade or business in the Philippines to which a fixed place of business such as an office or a branch is necessary, and since it did not provide the services in the Philippines for a period or periods aggregating more than six months within any twelve-month period, OHL is not deemed to have a permanent establishment with respect to such services. This being the case, payment made by AHI to OHL on the use for the Software (Orion Health Hospital Information System V6.0 sp4) is exempt from income tax, pursuant to Article 7, in relation to Article 5, of the Philippines-New Zealand tax treaty. This ruling is issued on the basis of the foregoing 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 Bureau of Internal Revenue