ITAD BIR Ruling No. 322-15

December 7, 2015 ITAD BIR RULING NO. 322-15 Article 12, Philippines-Japan tax treaty Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended Universal Robina Corporation 110 E. Rodriguez Jr. Avenue Libis, Quezon City Attention: Rolando L. Figueroa, Jr. Gentlemen : This refers to your application for tax treaty relief filed on June 15, 2012, requesting confirmation that the royalty payments by UNIVERSAL ROBINA CORPORATION ("Universal Robina") to NISSIN FOODS HOLDINGS CO., LTD. ("Nissin JP") are subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income as amended by a Protocol 1 ("Philippines-Japan tax treaty") . It is represented that Nissin JP is a resident of Japan for tax treaty purposes, based on the Certificate of Residence dated December 15, 2011, issued by the tax authority of Japan; that Nissin JP 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 May 16, 2012; that on the other hand, Universal Robina is a domestic corporation organized and existing under Philippine laws. It is further represented that on March 14, 2008, Nissin JP and Universal Robina entered into a Technology and Trademark License Agreement ("Agreement") whereby Nissin JP grants to Universal Robina an exclusive license to use technology without sublicensing rights for the use of said technology for the manufacture of products in the Philippines under its own brand "PAYLESS"; that for and in consideration of said license, Universal Robina shall pay Nissin JP a running royalty at the rate of a half percent (0.5 percent) for net sales of all licensed products sold during each semi-annual period or a fraction thereof upon early termination thereof. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides: "SEC. 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 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)". 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-Japan tax treaty. With respect to royalties, Paragraphs 1, 2, 3 and 4, Article 12 thereof provide: "Article 12 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting 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 in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; b) 10 per cent of the gross amount of the royalties in all other cases." 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. 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 and films or tapes for radio or television 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. xxx xxx xxx" Under paragraphs 2 and 3 of Article 12 of the Philippines-Japan tax treaty, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 15 percent of the gross amount of the royalties if they are paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting; (b) 10 per cent of the gross amount of the royalties in all other cases; (c) 10 percent of the gross amount of the royalties if they are paid by a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines. Under paragraph 4 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 cinematograph films and films or tapes for radio or television 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"). In this case, payments for the use of the license to use technology for the manufacture of Products in the Philippines are treated as payments for information concerning industrial, commercial or scientific experience, specifically, know-how in the production of noodles. Thus, this Office is of the opinion and so holds that royalty payments made by Universal Robina to Nissin JP shall be treated as royalties subject to 10 percent of the gross amount thereof pursuant to art. 12 (2) (b) of the RP-Japan tax treaty. As regards the imposition of the VAT on royalties paid to Nissin JP , please be informed further that Section 108 of the Tax Code of 1997 provides as follows: "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 twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, . . . The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx (2) The supply of scientific, technical or commercial knowledge information; xxx xxx xxx" Thus, the royalty payments made by Universal Robina to Nissin JP are subject to the 12% value-added tax (VAT) pursuant to Section 108 of the National Internal Revenue Code of 1997, as amended. Accordingly, Universal Robina , being the payor in control of the payment shall be responsible for the withholding of VAT on the said royalty payments on behalf of Nissin JP by filing a separate VAT return for and on behalf of Nissin JP 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 Universal Robina , if it is a VAT registered taxpayer. In case Universal Robina 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, Universal Robina 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 Nissin JP upon its request, and the fourth copy to be retained by Universal Robina 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income effective January 1, 2009. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.