ITAD BIR Ruling No. 354-15

December 10, 2015 ITAD BIR RULING NO. 354-15 Article 12 (Royalties), Philippines-Spain tax treaty La Revista Publications, Inc. G/F Smithbell Bldg., 2294 Chino Roces Ave. Ext., Magallanes, Makati Attention: Karin D. Pajuelas Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 14 March 2013 requesting confirmation that royalty fees paid by La Revista Publications, Inc. ("La Revista-Philippines") to HOLA S.L. ("HOLA-Spain") are subject to final withholding tax at the preferential rate of fifteen percent (15%) pursuant to the Convention between the Republic of the Philippines and Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Spain tax treaty") . 1 Facts It is represented that HOLA-Spain is a corporation organized and existing under the laws of Spain based on the notarized and consularized Residencia Fiscal En Espaa Conveio issued by the Agencia Tributaria of Spain and is engaged in the business of editing, printing, publishing, distribution and sale of the weekly magazines "HOLA", "Hello" and the like based on the notarized and consularized Articles of Incorporation of HOLA-Spain. The company HOLA-Spain 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 11 January 2013. On the other hand, La Revista-Philippines is a domestic corporation organized and existing under domestic laws. La Revista-Philippines and HOLA-Spain entered into a License Agreement ("License Agreement") on 15 October 2012 whereby HOLA-Spain agreed to grant La Revista-Philippines the right to publish the contents of "HOLA" and "Hello" magazines in a magazine of La Revista-Philippines . 2 In return, La Revista-Philippines shall pay to HOLA-Spain the corresponding license fees. 3 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 Sworn Statement issued by the Corporate Secretary of La Revista-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 HOLA-Spain are subject to income tax at the rate of 30 percent, thus: aScITE "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: 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: 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-Spain tax treaty, as amended. Article 12, thereof 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. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; b) 20 per cent in respect of cinematographic films or tapes for television or broadcasting; and c) 15 per cent of the gross amount of the royalties in all other cases. 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 works, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Where, owing to a special relationship between the payor and the recipient or between both of them and some other person, the amount of the royalties paid, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payor and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payment shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. Based on the foregoing, royalty payments made by a Philippine enterprise to a Spanish enterprise may be subject to the preferential tax rate of (i) 10% of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities, (ii) 20% in respect of cinematographic films or tapes for television or broadcasting, and (iii) 15% of the gross amount of the royalties in all other cases. It appearing that the gross amount of royalties to be paid by La Revista-Philippines to HOLA-Spain is not for the use of cinematograph films and films or tapes for radio or television broadcasting and that La Revista-Philippines is not registered with the BOI, this Office is of the opinion and so holds that license fees made by La Revista-Philippines to HOLA-Spain are subject to the preferential rate of 15% of the gross amount of royalties pursuant to Article 12 (2) (c) of the Philippines-Spain tax treaty. Moreover, the said license fees paid by La Revista-Philippines to HOLA-Spain 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 or services in the Philippines for others for a fee, remuneration or consideration, including . . . . The phrase 'sale of 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, La Revista-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 HOLA-Spain. In remitting the VAT withheld, La Revista-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 La Revista-Philippines upon filing its own VAT return, if it is a VAT-registered taxpayer. In case La Revista-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, La Revista-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 HOLA-Spain upon its request and the fourth copy to be retained by La Revista-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 tree herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. As amended by the Philippines-Spain Protocol. 2. See Section 5 of the License Agreement. 3. See Section 15 of the License Agreement. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.