ITAD BIR Ruling No. 340-13

December 6, 2013 ITAD BIR RULING NO. 340-13 Article 12 (Royalties), Philippines-Japan tax treaty Team Studio Japan KK Otemachi Tatemono Kamiyacho Bldg. 2F, 5-12-13 Toranomon, Minato-ku, Tokyo, Japan 105-0001 Attention: Margaret Acaylar Authorized Representative Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on 07 January 2013 requesting confirmation that royalties paid by Manila Electric Company ("MERALCO") to Team Studio Japan K.K. ("Team Studio-Japan") are subject to income tax at the 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 the Protocol ("Philippines-Japan tax treaty") . IaEASH Facts It is represented that Team Studio-Japan is a corporation organized and existing under the laws of Japan with business address at Otemachi, Tatemono Kamiyacho Building 2F, 5-12-13 Toranomon, Minato-ku, Japan based on the notarized and consularized Certificate of Residence issued by the District Director of Shiba Tax Office in Japan and is engaged in the business of (1) research, architect, development, manufacturing, sales, marketing, and technical support of computer software products; and (2) any other business related thereto based on the notarized and consularized Articles of Incorporation of Team Studio-Japan . The company Team Studio-Japan 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 27 November 2012. On the other hand, MERALCO is a domestic corporation with business address at 4/F Lopez Building, MOC Ortigas Avenue, Pasig City. Team Studio-Japan and MERALCO entered into a Subscription License Agreement on 30 December 2012 for use of AirWatch software based on a notarized and consularized Team Studio Order Form for AirWatch and End User License Agreement. MERALCO shall pay to Team Studio-Japan the corresponding royalties under the following terms and fees: 1 Product Description Unit Price US$ Term Qty. Subtotal US$ Discount (%) Total with no Discount AirWatchTM Hosted $48.00 per 1 year 600 $28,800 $1,080 $27,720 Subscription & Hosting year device ($3.85/mo. ($4.00/mo.) per device) AirWatchTM Account $1,500 One 1 $1,500 $1,500 Activation Time Fee AirWatchTM Service $10,000 One 1 $10,000 $10,000 pack-Enterprise-90 Time Fee hours of support 24x7 Support Services Total in US$ $39,220 ====== As per Certification issued by Sumitomo Banking Corporation of Japan, MERALCO made a remittance of Thirty Nine Thousand Two Hundred Twenty US Dollars (US$39,220.00) in favor of Team Studio-Japan for payment of royalties on 08 January 2013. 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 statement issued by the Senior Assistant Vice-President of MERALCO on 19 July 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, royalty payments made to Team Studio-Japan is subject to income tax at the rate of 30 percent, thus: "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%)." HaEcAC However, under Section 32 (B) (5) of the NIRC of 1997, these royalties may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: 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." For this purpose, you invoke the Philippines-Japan tax treaty, as amended. Article 12, thereof provides: "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." Based on the foregoing, royalty payments made by a Philippine enterprise to a Japanese enterprise may be subject to the preferential tax rate of (i) 15% of the gross amount of royalties if the royalties are paid in respect to the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; or (ii) 10% of the gross amount of royalties in other cases. It appearing that the gross amount of royalties to be paid by MERALCO to Team Studio-Japan is not for the use of cinematograph films and films or tapes for radio or television broadcasting, such royalty payments are subject to the preferential rate of 10% of the gross amount of royalties. Moreover, the said royalty payments by MERALCO to Team Studio-Japan shall be subject to the 12% value-added tax (VAT) under Section 108 of the Tax Code, as amended, which provides as follows: ICHAaT "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 or 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; xxx xxx xxx" Accordingly, MERALCO, 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 Team Studio-Japan . In remitting the VAT withheld, MERALCO 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 MERALCO upon filing its own VAT return, if it is a VAT-registered taxpayer. In case MERALCO 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, MERALCO 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 Team Studio-Japan upon its request and the fourth copy to be retained by MERALCO 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. aSDHCT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Page 1 of the Team Studio Order for AirWatch.