ITAD BIR Ruling No. 368-15

December 22, 2015 ITAD BIR RULING NO. 368-15 Article 12, Philippines-Korea tax treaty Daesang Ricor Corporation 6th Floor, Legaspi Towers 200 107 Paseo de Roxas, Makati City Attention: Jung Sung Yong President Gentlemen : This refers to your tax treaty relief application filed on November 12, 2015, on behalf of Daesang Corporation ("DC"), requesting confirmation that royalties paid by Daesang Ricor Corporation ("DRC") to DC are subject to 15 percent final withholding tax rate pursuant to Article 12 of the Convention between the Republic of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Korea tax treaty"). TAacHE It is represented that DC is a resident corporation in Korea for purposes of Korean taxation based on the Certificate of Residence issued on November 9, 2015 by the National Tax Service of Korea; that it is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated November 27, 2015; and that, on the other hand, DRC is a corporation organized and existing under the laws of the Philippines. It is further represented that on December 21, 2012, DC and DRC entered into Technology Assistance and License Agreement ("Agreement") whereby DC grants a non-exclusive, non-assignable license to DRC, to use DC's Technology 1 and Trademark(s) 2 for the purpose of manufacturing and selling the Products 3 within the Territory; 4 that in consideration thereof, DRC shall pay a license fee to DR, calculated by multiplying the Annual Aggregate Sales 5 of DRC by point six percent (0.6%). It is finally represented, per Sworn Statement dated November 23, 2015 issued by DRC, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 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." Thus, you invoked Article 12 of the Philippines-Korea tax treaty which 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 if such resident is the beneficial owner of the royalties. 2. However, such royalties may be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. 3. Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. HDICSa 4. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or right to use, any copyright of literary, artistic or scientific work, 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 or tapes for the use of radio broadcasting. . . ." Based on the foregoing provisions, royalty payments to a non-resident Korean corporation may be taxed at a preferential tax rate of 10 percent if the payor is registered with the Board of Investments (BOI) and engaged in preferred pioneer areas of investment, and 15 percent of the gross amount of royalties in all other cases. Such being the case, the royalties paid by DRC to DC are subject to 15 percent final withholding tax rate pursuant to Article 12 (2) of the Philippines-Korea tax treaty. Moreover, as provided in Section 108 of the Tax Code of 1997, the said royalties are subject to value-added tax (VAT): "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 (12%) 6 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (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." As to the procedure for the withholding and the payment of VAT, DRC, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such royalties before making any payment to DC. In remitting the VAT withheld, DRC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from DRC if it is a VAT-registered taxpayer. In case DRC is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, DRC is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for DC and the fourth copy for DRC as its file copy. [ Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002 ] This ruling is issued on the basis of the foregoing 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. IDaEHC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "Technology" means technical information, patents, designs, know-how, blue-prints, and specifications possessed by DC concerning the manufacture of various products including the Products (glucose syrup with maltose sugar as the main ingredients, to be manufactured by DRC using the Technology or such products bearing the Trademarks) by hydrolyzing starch slurry through enzyme and refining and concentrating the same depending on the level of hydrolysis and sugar compound. 2. "Trademark(s)" means brands belonging to DC as shown in Annex 1 of the Agreement , and such other brands or trademarks as may be agreed between DC and DRC. 3. "Products" means glucose syrup with maltose sugar as the main ingredients, to be manufactured by DRC using the Technology or such products bearing the Trademarks. 4. "Territory" means the Philippines. 5. "Annual Aggregate Sales" means the total gross sales of the Products, less sales returns and sales discounts, all determined by a qualified external auditor mutually agreed upon by DC and DRC. 6. The VAT rate was increased to 12% on 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.