ITAD BIR Ruling No. 377-12

November 16, 2012 ITAD BIR RULING NO. 377-12 Article 12, Philippines-Japan tax treaty; BIR Ruling No. ITAD 160-12 Takasago Philippines, Inc. 4th Floor, Raha Sulayman Building 108 Benavidez Street, Legaspi Village Makati City Attention: Tetsuo Mizumoto Vice President Gentlemen : This refers to your tax treaty relief application filed on January 18, 2008 requesting confirmation that royalties paid by Takasago Philippines, Inc. ("Takasago Philippines") to Takasago Thermal Engineering Company Ltd. ("Takasago Engineering") are subject to preferential tax rate 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 ("Philippines-Japan tax treaty") . Facts Takasago Engineering is a foreign corporation and a resident of Japan based on the Certificate of Status of Taxable Person issued by the Kanda Tax Office in Japan on December 28, 2007. Takasago Engineering is located at 2-5 Kanda-Surugadai 4-chome, Chiyoda-ku, Tokyo, Japan. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on January 10, 2008. On the other hand, Takasago Philippines is a domestic corporation located at 4th Floor, Raha Sulayman Building, 108 Benavidez Street, Legaspi Village, Makati City. On January 11, 2005, Takasago Philippines and Takasago Engineering entered into a Design Assistance Renewal Agreement where Takasago Engineering agreed to provide technical design and information to Takasago Philippines relating to clean-room construction services. Technical design and information covers technical project design and the provision of the most advanced engineering standards for heating, ventilation and air-conditioning systems, clean room system and utilities system (compressed air system, process cooling water system, process vacuum and process exhaust system, waste water treatment system and deionized water system). In consideration, Takasago Philippines will pay fees to Takasago Engineering equivalent to 5 percent of the contract price of each project successfully undertaken by Takasago Philippines utilizing the said technical design and information from Takasago Engineering. The fees are payable within three months of the following year after the completion of such project. The Agreement originally took effect on January 1, 2003 and remained in effect for a period of five years or until December 31, 2007. The Agreement complies with the provisions of the Intellectual Property Code on voluntary licensing under Certificate of Compliance No. 5-2005-00043 issued by the Intellectual Property Office on April 19, 2005, valid on January 1, 2003 to December 31, 2007. aIHCSA On June 21, 2006, Takasago Philippines and Takasago Engineering entered into a Technical Assistance Renewal Agreement where Takasago Engineering agreed to provide technical information and technical advice to Takasago Philippines relating to air-conditioning and ventilation systems (including clean-room technology). Technical information covers information pertaining to the overall management of air-conditioning and ventilation systems, the engineering, planning and control of these systems, and the testing, inspection and quality control of the systems. Technical advice covers the provision of such technical information and of the most advanced engineering literature, specification, standards, and other relevant data incidental to air-conditioning and ventilation systems. In consideration, Takasago Philippines will pay royalties to Takasago Engineering equivalent to 3 percent of the contract price of each project successfully undertaken by Takasago Philippines utilizing the said technical information and technical advice from Takasago Engineering. The fees are payable within three months of the following year after the completion of such project. The Agreement took effect on June 21, 2006 and will remain in effect for a period of ten years thereafter or until June 20, 2016. The Agreement complies with the provisions of the Intellectual Property Code on voluntary licensing under Certificate of Compliance No. 5-2006-00045 issued by the Intellectual Property Office on June 22, 2006, valid on June 21, 2006 to June 20, 2016. Ruling Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , 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 at least fifteen days before the intended transaction or payment of income, thus: "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 ours) This condition is emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 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 the 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 01-2000 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 . THaAEC 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 ours) This decision is upheld by the Supreme Court in Resolution G.R. No. 168531 on February 18, 2008. Furthermore, the necessary requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011) . In view of the foregoing, since the two Agreements that give rise to the fees have been in effect on January 1, 2003 and June 21, 2006 , but the TTRA for this purpose was filed only on January 18, 2008 , this Office hereby DENIES relief on all fees paid by Takasago Philippines to Takasago Engineering before February 2, 2008 , pursuant to Section III (2) of RMO 1-2000. Accordingly, said fees shall be subject to income tax under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), 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, the license fees for the use of the technical design and information relating to clean-room construction services and for the use of the technical information and technical advice relating to air-conditioning and ventilation systems, being royalties for the use of design and know-how , paid to Takasago Engineering on February 2, 2008 and thereafter are subject to preferential treatment under paragraphs 1, 2 and 4, Article 12 of the Philippines-Japan tax treaty, to wit: " 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: HcSaAD 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. xxx xxx xxx 4. 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 cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, 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." The Protocol Amending 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 , which took effect on January 1, 2009 , reduced the rate in subparagraph (b) to 10 percent, to wit: "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: xxx xxx xxx b) 10 per cent of the gross amount of the royalties in all other cases." Under Article 12, royalties arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 15 percent if the royalties are in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting, and (b) before January 1, 2009, 25 percent, and beginning January 1, 2009, 10 percent, in all other cases. Royalties 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 cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, 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 (" know-how "). Accordingly, since the royalties for the use of the said technical design and information and the technical information and technical advice are not royalties for the use of cinematograph films and films or tapes for radio or television broadcasting, such royalties paid by Takasago Philippines to Takasago Engineering on February 2 to December 31, 2008 shall be subject to income tax at the rate of 25 percent , and at the rate of 10 percent beginning January 1, 2009 , pursuant to paragraph 2 (b), Article 12 of the amended Philippines-Japan tax treaty. (BIR Ruling No. ITAD 160-12 dated April 16, 2012) Furthermore, under Section 108 (A) of the Tax Code, the said royalties, being payments for the use of intangible properties ( know-how and design ) in the Philippines, are subject to value-added tax ("VAT"), to wit: "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 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, 1 raise the rate of value-added tax to twelve percent (12%) . . ." Relative thereto, Takasago Philippines shall withhold VAT on the royalties at the rate of 10 percent before February 1, 2006, and 12 percent beginning February 1, 2006, before remitting them to Takasago Engineering. Takasago Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and accompanying proof of payment shall serve as documentary substantiation for Takasago Philippines ' claim of input tax on the royalties; otherwise, it may treat such VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. 2 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. IaCHTS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. The VAT rate was increased to 12 percent beginning 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. 2. Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005) , as amended by Revenue Regulations No. 4-2007 (Amending Certain Provisions of Revenue Regulations No. 16-2005, As Amended, Otherwise Known as the Consolidated Value-Added Tax Regulations of 2005) , which provides: "SEC. 4.114-2. Withholding of VAT on Government Money Payments and Payments to Non-Residents. xxx xxx xxx (b) The government or any of its political subdivisions, instrumentalities or agencies including GOCCs, as well as private corporation, individuals, estates and trust, whether large or non-large taxpayers, shall withhold twelve percent (12%) VAT, starting February 1, 2006, with respect to the following payments: (1) Lease or use of properties or property rights owned by non-residents; and (2) Services rendered to local insurance companies with respect to reinsurance premiums payable to non-residents; and (3) Other services rendered in the Philippines by non-residents. In remitting VAT withheld, the withholding agent shall use BIR Form No. 1600 Remittance Return of VAT and Other Percentage Taxes Withheld. VAT withheld and paid for the non-resident recipient (remitted using BIR Form No. 1600), which VAT is passed on to the resident withholding agent by the non-resident recipient of the income, may be claimed as input tax by said VAT-registered withholding agent upon filing his own VAT Return, subject to the rule on allocation of input tax among taxable sales, zero-rated sales and exempt sales. The duly filed BIR Form No. 1600 is the proof or documentary substantiation for the claimed input tax or input VAT. Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said passed-on VAT by the non-resident recipient of the income, evidenced by the duly filed BIR Form No. 1600, shall form part of the cost of purchased services, which may be treated either as an 'asset' or 'expense', whichever is applicable, of the resident withholding agent. VAT withheld under this Section shall be remitted within ten (10) days following the end of the month the withholding was made."