ITAD BIR Ruling No. 340-15

December 7, 2015 ITAD BIR RULING NO. 340-15 Article 12 (Royalties), Philippines-Japan tax treaty Isla Lipana & Co. 29th Floor, Philamlife Tower, 8767 Paseo de Roxas, 1226 Makati City Attention: Roselle K. Yu Authorized Representative Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on 30 October 2013 requesting confirmation that royalties paid by Cavite Nagano Seiko, Inc. ("Cavite Nagano-Philippines") to Nagano Seiko Co., Ltd. ("Nagano-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 ("Philippines-Japan tax treaty") . cHaCAS Facts It is represented that Nagano-Japan is a corporation organized and existing under the laws of Japan based on the notarized and consularized Certificate of Status of Taxable Person Ministry of Foreign Affairs of Japan and is engaged in the business of manufacturing and sale of precision machines, among other things based on the notarized and consularized Articles of Incorporation of Nagano-Japan . The company Nagano-Japan is licensed to establish a representative office in the Philippines based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission. On the other hand, Cavite Nagano-Philippines is a PEZA-registered domestic corporation organized and existing under Philippine laws. Nagano-Japan and Cavite Nagano-Philippines entered into a Royalty Agreement ("Royalty Agreement") whereby Nagano-Japan agreed to furnish Cavite Nagano-Philippines an indivisible, non-transferable and non-exclusive right and license 1 to use certain intellectual property and know-how and in return, Cavite Nagano-Philippines will pay royalty fees to Nagano-Japan at the rate of 0.3% of the entire sales amount of Cavite Nagano-Philippines based on a notarized Royalty Agreement . The representative office of Nagano-Japan in the Philippines, Nagano Seiko Co., Ltd.-Representative Office ("Nagano Representative-Philippines") , did not participate in the Royalty Agreement nor in the realization of the royalty fees based on a notarized Sworn Statement from Nagano-Representative-Philippines . As per Certification issued by Rizal Commercial Banking Corporation, Cavite Nagano-Philippines made a remittance of Seven Hundred Ninety Seven Thousand Three Hundred Eighty Six Yen (797,386.00) in favor of Nagano-Japan for payment of royalties on 18 February 2014. 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 from Cavite Nagano-Philippines . 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 Nagano-Japan are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . DACcIH 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)". 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: HSCATc 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 Cavite Nagano-Philippines to Nagano-Japan is not for the use of cinematograph films and films or tapes for radio or television broadcasting but for use of trademarks or trade names owned by Nagano-Japan , such royalty payments are subject to the preferential rate of 10% of the gross amount of royalties pursuant to Article 12 of the Philippines-Japan tax treaty . Moreover, the said royalty payments by Cavite Nagano-Philippines to Nagano-Japan 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 . IDTSEH (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, Cavite Nagano-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 Nagano-Japan . In remitting the VAT withheld, Cavite Nagano-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 Cavite Nagano-Philippines upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Cavite Nagano-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, Cavite Nagano-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 Nagano-Japan upon its request and the fourth copy to be retained by Cavite Nagano-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]. SICDAa 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. Art. 1 (Grant of License), Royalty Agreement: Subject to the terms of this agreement, NS hereby grants to CNSI an indivisible, non-transferable and non-exclusive right and license to use during the term and on the conditions set forth in this agreement certain intellectual property and know-how, including trade names or trademarks owned or controlled by NS, designs or drawings and valuable information on the automobile, electric, lawn mower and agricultural industries in Japan, necessary to the manufacture, assembly and sale of products of NS. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.