ITAD BIR Ruling No. 338-13

December 6, 2013 ITAD BIR RULING NO. 338-13 Article 13 (Royalties), Philippines-United States tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: Wilfredo U. Villanueva Authorized Representative Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on 23 November 2012 requesting confirmation that royalties paid by Concepcion-Carrier Air Conditioning Company ("Concepcion-Philippines") to Carrier Corporation ("Carrier-United States") are subject to income tax at the rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty") . TaIHEA Facts It is represented that Carrier-United States is a corporation organized and existing under the laws of the United States with business address at One Carrier Place, Farmington, Connecticut, United States of America based on the notarized and consularized Certification issued by the US Internal Revenue Service on its notarized and consularized Restated Certificate of Incorporation by the Secretary of State of Delaware. Carrier-United States 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 29 November 2012. On the other hand, Concepcion-Philippines is a domestic corporation with business address at Km. 20 East Service Road, South Superhighway, Alabang, Muntinlupa City 1700. It is represented that on 23 October 2009, Carrier-United States and Concepcion-Philippines entered into a manufacturing, trademark and technical assistance agreement based on the notarized and certified true copy of the "Amended and Restated Manufacturing, Trademark and Technical Assistance Agreement" ("ARMTTA agreement") . Concepcion-Philippines is provided by Carrier-United States technical data, know-how, and technical assistance and trademark rights. In return, Concepcion-Philippines shall pay royalty fees in accordance with the following terms and conditions: (1) Technical Assistance Fee on the first day of the month following the date of execution of the ARMTTA agreement and thereafter, in an amount generally expected to be a percentage of the Net Sales Price as agreed from time to time; and (2) Trademark Fee beginning on the effective date of the ARMTTA agreement and thereafter, in an amount equivalent to one percent (1%) of the Net Sales Price of all sales and other transfers by Concepcion-Philippines of Trademark Apparatus and components. As per notarized Certification issued by Citibank Manila, Concepcion-Philippines made an outward remittance of Seventy Thousand One Hundred Forty Three US Dollars and Ninety Three Cents (US$70,143.93) in favor of Carrier-United States on 11 December 2012. It is finally represented that the royalties subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the notarized Sworn Statement issued by the Chief Finance Officer of Concepcion-Philippines on 23 November 2012. Ruling In reply, please be informed that under Section 14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Application [TTRA] Pursuant to Existing Philippine Tax Treaties) ["RMO 72-2010"] , which covers income derived or which accrued on 04 November 2010 and thereafter , 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 before the first taxable event subject of the TTRA, to wit: HACaSc " SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transactions for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO ." (Emphasis ours) In relation thereto, Revenue Memorandum Order No. 1-2000 (Procedures for Processing Tax Treaty Relief Application) ["RMO No. 1-00"] , which covers income derived or accrued before 04 November 2010, provides that any availment of relief shall be preceded by an application filed at least fifteen (15) days before the intended transaction or payment of income, to wit: " 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 supplied) This condition is emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (CTA Case No. 6382 dated 07 June 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 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 No. 1-2000 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 supplied) ICDSca Furthermore, the necessary requirement laid down in RMO No. 1-00 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (CTA Case No. 456 dated 29 May 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (CTA Case Nos. 6699, 6844 and 7166 dated 29 March 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (CTA Case No. 7864 dated 12 April 2011) . In this case, ARMTTA Agreement was entered into between Carrier-United States and Concepcion-Philippines on 23 October 2009 but the TTRA was filed only on 23 November 2012, this Office hereby DENIES relief on all royalties paid by Concepcion-Philippines to Carrier-United States on or before 23 November 2012 pursuant to Section 14 of RMO No. 72-10 and RMO No. 1-00. Accordingly, said royalties shall be subject to income tax under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , 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%)." On the other hand, royalties paid to Carrier-United States on 24 November 2012 and thereafter are subject to a reduced rate of income tax under Article 13 of the Philippines-United States tax treaty: "Article 13 Royalties 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. However, the tax imposed by that other Contracting State shall not exceed a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and aCIHAD (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. 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 or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof." Based on the foregoing, royalty payments made by a Philippine enterprise to an American enterprise may be subject to the preferential tax rate of (i) 25% of the gross amount of royalties; or (ii) 15% of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. In relation to paragraph (iii) of the Philippines-United States tax treaty , Article 12 of the Philippines-United Arab Emirates tax treaty provides: "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 if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties. The competent authorities of the Contracting States shall, by mutual agreement, settle the mode of application of this limitation. 3. The term "royalties" as used in this Article means payment 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 or tapes for television or radio 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." cHECAS Based on the above-mentioned provisions, the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind and paid under similar circumstances to a resident of a third State. Relative thereto, it is noteworthy that under Article 12 (2) of the Philippines-United Arab Emirates tax treaty , the tax so charged shall not exceed 10 percent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting. In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals , 1 the Supreme Court interpreted the "most-favored-nation" clause, particularly the phrase "paid under similar circumstances" under the Philippines-United States tax treaty , as referring to the manner of payment of taxes and not to the subject matter of the tax which is royalties. Significantly, Article 23 of the Philippines-United States tax treaty and Article 23 of the Philippines-United Arab Emirates tax treaty reads in part: "Article 23 Relief from Double Taxation Double taxation of income shall be avoided in the following manner: 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. . . ." "Article 23 Elimination of Double Taxation 1. In the case of the Philippines, double taxation shall be eliminated as follows: Subject to the laws of the Philippines and the limitations thereof regarding the allowance of a credit against Philippine tax of tax payable in any country other than the Philippines, United Arab Emirates tax payable in respect of income derived from the United Arab Emirates shall be allowed as credit against the Philippine tax payable in respect of that income; ITESAc 2. In the case of the United Arab Emirates, double taxation shall be eliminated as follows: Where a resident of the United Arab Emirates derives income which in accordance with the provisions of this Agreement, may be taxed in the Philippines, the United Arab Emirates shall allow as a deduction from tax on income of that person an amount equal to the tax on income paid in the Philippines." Article 23 of the Philippines-United States tax treaty and Article 23 of the Philippines-United Arab Emirates tax treaty, though differently worded, plainly reveal a similarity in the provisions on relief from or avoidance of double taxation to their respective residents. Thus, the tax on royalty payments to residents of the United States and United Arab Emirates are paid under similar circumstances, i.e., the amount of royalty income tax paid or accrued to the Philippines under the respective tax treaties is available as tax credit against the income tax payable in their respective countries. United States residents may, therefore, invoke the preferential tax rate of 10% on royalties, arising in the Philippines for the "use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films and films or tapes for television or radio 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" pursuant to the "most-favored-nation" clause of the Philippines-United States tax treaty. Such being the case, this Office is of the opinion and so holds that royalty payments made by Concepcion-Philippines to Carrier-United States on 24 November 2012 and thereafter are subject to the preferential rate of 10% pursuant to the "most-favored-nation" provision of the Philippines-United States tax treaty in relation to the Philippines-United Arab Emirates tax treaty. Moreover, the said royalty payments by Concepcion-Philippines to Carrier-United States shall be subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code, as amended, which 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 ten percent (10%) of the 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, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: xxx xxx xxx The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including. . . . The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; CHDAEc xxx xxx xxx" Accordingly, Concepcion-Philippines , being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT on such royalty before making any payment to Carrier-United States . In remitting the VAT withheld, Concepcion-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Concepcion-Philippines upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Concepcion-Philippines is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of goods or properties purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, Concepcion-Philippines is required to issue the Certificate of Final Income Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Carrier-United States upon its request and the fourth copy to be retained by Concepcion-Philippines as its file 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); Section 4.114 (d), as amended by RR 28-03]. 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. G.R. No. 127105, 25 June 1999.