ITAD BIR Ruling No. 338-12

September 6, 2012 ITAD BIR RULING NO. 338-12 Article 12, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 33-11; BIR Ruling No. 37-11 Technol Eight Philippines Corporation 127 East Main Avenue Special Economic Zone Laguna Technopark Bian, Laguna Attention: Takaichi Hattori President Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on August 24, 2006 requesting confirmation that dividends and royalties paid by Technol Eight Philippines Corporation ("Technol Philippines") to Technol Eight Company Ltd. ("Technol") are subject to income tax at the rates of 10 percent and 25 percent, respectively, 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 ("Philippines-Japan tax treaty") ,as amended by a Protocol 1 effective January 1, 2009. Facts Technol is a corporation organized and existing under the laws of Japan based on the Application for Certification of Domicile duly approved by the Owari-Seto Tax Office in Japan on September 15, 2006. Technol is located at 1 Akatsuki-cho, Seto-shi, Aichi, Japan. Technol is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on June 20, 2006. On the other hand, Technol Philippines is a domestic corporation located at 127 East Main Avenue, Special Economic Zone, Laguna Technopark, Bian, Laguna, Philippines. Technol Philippines is registered with the Board of Investments with a pioneer status under Certificate of Registration No. DP 97-231 issued on October 21, 1997. Technol Philippines is a new producer of automotive parts and components such as air cleaners, torque boxes, oil strainers, center body pillars, tail gates, door inside panels, and similar precision-pressed car components; and that Technol Philippines is also registered with the Philippine Economic Zone Authority ("PEZA") as an ecozone export enterprise under Certificate of Registration No. 05-52 issued on September 1, 2005. HIEAcC Dividends Based on the Certifications issued by the Corporate Secretary of Technol Philippines on May 12, June 5 and December 5, 2006, Technol Philippines ,through a resolution approved by its Board of Directors on March 27, 2006, declared cash dividends of P50,000,000.00 in favor of its stockholders of record as of that date. The dividends were paid on or before March 30, 2006, and were taken from the retained earnings of Technol Philippines as of December 31, 2005. Also, Technol Philippines ,through a resolution approved by its Board of Directors on May 8, 2006, declared cash dividends of P50,000,000.00 in favor of its stockholders of record as of that date. The dividends were paid on or before May 10, 2006, and were taken from the retained earnings of Technol Philippines as of March 7, 2006 (P20,000,000.00) and as of December 31, 2005 (P30,000,000.00). Technol holds 99.99 percent of the total shares of stock of Technol Philippines during the period of six months before the declaration of the dividends. Royalties On January 19, 2004, Technol Philippines and Technol entered into a Renewal Agreement to the Technical Assistance Agreement originally entered into by the parties on May 28, 1998. The original Agreement expired on May 27, 2003, and the Renewal Agreement extends the term of the original Agreement indefinitely. Under the original Agreement, Technol granted Technol Philippines the right to use Technol 's know-how on metal stamping and its technical information on confidential engineering data, drawings, specifications, and procedures, documents on certain methods and operating techniques, and other technical information. In consideration, Technol Philippines will pay royalties to Technol equivalent to 3.5 percent of Technol Philippines' net sales (excluding die and checking fixture),which may be reviewed by the parties after the third anniversary of the Agreement. The royalties are due and payable on or before March 31 of the calendar year for sales made by Technol Philippines in the previous calendar year. Ruling Relative thereto, 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 15 days before the intended transaction or payment of income, thus: HcACTE "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) TEAICc This decision is upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, this 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, with respect to dividends paid by Technol Philippines to Technol, since they were paid on or before March 30, 2006 (first dividends) and on or before May 10, 2006 (second dividends),but the subject TTRA was filed on August 24, 2006 ,this Office hereby DENIES relief on these dividends for having the TTRA filed beyond the fifteen-day period prescribed in the RMO. Accordingly, said dividends shall be subject to income tax at the rate of 35 percent 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%)." EIcSTD Similarly, with respect to royalties paid by Technol Philippines to Technol under the Renewal Agreement, this Office likewise DENIES relief on royalties paid by Technol Philippines to Technol before September 8, 2006 which were computed based on Technol Philippines' net sales in 2005 and in previous years. Accordingly, said royalties shall be subject to income tax at the rate of 35 percent under Section 28 (B) (1) of the Tax Code. On the other hand, royalties paid by Technol Philippines to Technol on September 8, 2006 and thereafter which were computed based on Technol Philippines' net sales in 2006 and in previous years shall be taxed in accordance with paragraphs 1, 2 and 3, Article 12 of the Philippines-Japan tax treaty, to wit: " 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) 25 per cent of the gross amount of the royalties in all other cases. 2 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." The Protocol amended paragraph 2 (b) as follows: "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: xxx xxx xxx b) 10 per cent of the gross amount of the royalties in all other cases." Under paragraphs 2 and 3, Article 12, 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) 10 percent if the company paying the royalties is registered with the Board of Investments ("BOI") and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; (b) 15 percent 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; and (c) before January 1, 2009, 25 percent, and beginning January 1, 2009, 10 percent, in all other cases. Under paragraph 4 of the same article, 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") . Accordingly, royalties paid by Technol Philippines to Technol under the Renewal Agreement concerning Technol Philippines' right to use Technol 's know-how on metal stamping and its technical information on confidential engineering data, drawings, specifications, and procedures, documents on certain methods and operating techniques, and other technical information, being royalties for the use of know-how and not for the use of cinematograph films and films or tapes for radio or television broadcasting, shall be subject to income tax at the rate of 25 percent (for royalties paid after the revocation of Technol Philippines' BOI registration but before January 1, 2009) and 10 percent (for royalties paid beginning January 1, 2009). (BIR Ruling No. ITAD 33-11 dated January 28, 2011; BIR Ruling No. ITAD 37-11 dated February 2, 2011) AIaSTE The rate of 10 percent under paragraph 3 of Article 12 does not apply to royalties paid by Technol Philippines although it was registered previously with the BOI with a pioneer status under Certificate of Registration No. DP 97-231 issued on October 21, 1997. The fiscal and non-fiscal incentives available to Technol Philippines as a BOI-registered enterprise, and consequently, the whole registration of Technol Philippines with BOI, are considered revoked when it registered with PEZA to avail of fiscal and non-fiscal incentives under Republic Act No. 7916 , 3 as amended, otherwise known as the PEZA law. Technol Philippines is registered with PEZA under Certificate of Registration No. 05-52 issued on September 1, 2005. B. * On value-added tax Under Section 108 (A) of the Tax Code, royalties paid by Technol Philippines to Technol, being payments for the use of intangible properties (technical know-how and technical information) 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: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, 4 raise the rate of value-added tax to twelve percent (12%) ..." However, since Technol Philippines is registered with PEZA and covered by the provisions of Republic Act No. 7916, the Supreme Court ruled in Commissioner of Internal Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866 dated February 11, 2005) that: "Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. ICAcHE This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus .Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that 'no taxes, local and national, shall be imposed on business establishments operating within the ecozone.' Since this law does not exclude the VAT from the prohibition, it is deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly." Accordingly, since Technol Philippines is not subject to VAT directly on its sale of goods and supply of services to its customers, and indirectly on its purchase of goods and services when such purchase is subject to VAT, such royalties paid by Technol Philippines to Technol, a foreign corporation and not a VAT-registered taxpayer, shall be exempt from VAT instead of being subject to VAT at zero percent. 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. cISDHE 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. 2. The Protocol reduced the rate from 25 percent to 10 percent. 3. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes . 4. 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.