ITAD BIR Ruling No. 391-12

December 10, 2012 ITAD BIR RULING NO. 391-12 Article 12 Philippines-Japan tax treaty Angara Abello Concepcion Regala and Cruz Law Offices 22nd Floor, ACCRALAW Tower 2nd Avenue corner 30th Street Crescent Park West Bonifacio Global City Taguig City Attention: Atty. Ruby Rose J. Yusi Atty. Eric R. Recalde Atty. Mark David P. Martinez Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on March 31, 2009 requesting confirmation that royalties paid by Ajinomoto Philippines Corporation ("Ajinomoto Philippines") (formerly Union Ajinomoto, Inc. ) to Ajinomoto Company, Inc. ("Ajinomoto") 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 ("Philippines-Japan tax treaty") . 1 Facts Ajinomoto is a foreign corporation and a resident of Japan based on its Certificate of Domicile issued by the Kyobashi Tax Office in Japan on March 4, 2009. Ajinomoto is located at 15-1, Kyobashi 1-chome, Chuo-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 March 31, 2009. On the other hand, Ajinomoto Philippines is a domestic corporation located at Ajinomoto Building, 331 Sen. Gil Puyat Avenue, Makati City, Philippines. On July 1, 1999, October 1, 2003, November 1, 2003, March 15, 2004 and January 4, 2005, Ajinomoto Philippines and Ajinomoto entered into separate License Agreements where Ajinomoto granted Ajinomoto Philippines a non-exclusive, non-transferable, and non-divisible right and license (with no right to sublicense) to manufacture and sell the following products in the Philippines by using the know-how developed by and belonging to Ajinomoto on these products: (1) mixed seasoning in powder or granule form produced from a mixture of salt, monosodium glutamate, spices and other ingredients; (2) a low calorie sweetener with the use of aspartame as main ingredient; (3) soup base seasoning mix; (4) mixed powder seasoning for deep fried dishes; and (5) seasoning used in stir fried dishes in powder or granule form produced from a mixture of monosodium glutamate, meat flavors, other flavors, edible salt, and other ingredients. Likewise, Ajinomoto granted Ajinomoto Philippines a non-exclusive and non-transferable right and license (with no right to sublicense) to use the following trademarks on the products: (1) Ajinomoto and Aji-Shio and their derivatives; (2) Ajinomoto and Fres-C and their derivatives; (3) Ajinomoto and Sabaw and their derivatives; (4) Ajinomoto and Crispy Fry and their derivatives; and (5) Ajinomoto and its derivatives. In consideration, Ajinomoto Philippines will pay royalties to Ajinomoto equivalent to 1.5 percent of its net sales of the products for the use of know-how, and 1 percent of its net sales of the products for the use of trademarks. The royalties are computed every semester from April to September and October to March and payable within 90 days after each semester. Each agreement took effect on the date it was executed and will be in effect for a period of ten years from such date; thereafter, the Agreement will be automatically renewed for successive periods of ten years. The first License Agreement on July 1, 1999 was slightly amended on April 4, 2000. The Agreements comply with the provisions of the Intellectual Property Code on voluntarily licensing under the following Certificates of Compliance issued by the Intellectual Property Office ("IPO"), to wit: Date of License Certificate of Date of Issuance Validity Agreement Compliance Number July 1, 1999 5-2000-00020 June 14, 2001 July 1, 1999 to June 30, 2009 October 1, 2003 5-2003-00063 April 28, 2004 October 1, 2003 to September 30, 2013 November 1, 2003 5-2004-00018 January 21, 2004 November 1, 2003 to October 31, 2013 March 15, 2004 5-2004-00043 May 11, 2004 March 15, 2004 to March 14, 2014 January 4, 2005 5-2005-00001 April 5, 2005 January 4, 2005 to January 3, 2015 On December 31, 2007, Ajinomoto Philippines and Ajinomoto entered into a License Agreement where Ajinomoto granted Ajinomoto Philippines a non-exclusive and non-transferable right and license (with no right to sublicense) to repack and sell in the Philippines, monosodium glutamate ("product") imported by Ajinomoto Philippines from Ajinomoto or the latter's affiliates, by using the know-how developed by and belonging to Ajinomoto. Ajinomoto likewise granted Ajinomoto Philippines a non-exclusive and non-transferable right and license (with no right to sublicense) to use the trademark Ajinomoto and its derivatives. In consideration, Ajinomoto Philippines will pay royalties to Ajinomoto equivalent to 2 percent of its net sales of the product. The royalties are computed every quarter from January to March, April to June, July to September, and October to December, and payable within sixty days after each quarter. The Agreement took effect on January 1, 2008 for a period of ten years. The Agreement complies with the provisions of the Intellectual Property Code on voluntarily licensing under Certificate of Compliance No. 5-2007-00113 issued by the IPO on February 26, 2008, valid for ten years from January 1, 2008 to December 31, 2017. cCTAIE 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. CAScIH 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. 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. EB 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 Agreements that give rise to the royalties have been in effect since July 1, 1999, October 1, 2003, November 1, 2003, March 15, 2004, January 4, 2005 and January 1, 2008, but the relevant TTRA was filed only on March 31, 2009 , this Office hereby DENIES relief on all royalties paid by Ajinomoto Philippines to Ajinomoto before April 15, 2009, 2 pursuant to Section III (2) of RMO 1-2000. Accordingly, said royalties 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: HCATEa "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%)" 3 On the other hand, royalties paid to Ajinomoto on April 15, 2009 and thereafter are subject to a reduced rate of income tax 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: 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; cADSCT 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." 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 paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting, and (b) 10 percent in all other cases. The term 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 paid by Ajinomoto Philippines to Ajinomoto are payments for the use of know-how, secret formula and trademark in connection with the manufacture and sale or repacking and sale of monosodium glutamate, mixed seasoning, low calorie sweetener, soup base seasoning mix, mixed powder seasoning for deep fried dishes, and seasoning for stir fried dishes, and not for the use of cinematograph films and films or tapes for radio or television broadcasting, such royalties paid to Ajinomoto on April 15, 2009 and thereafter shall be subject to income tax at the rate of 10 percent, pursuant to paragraph 2 (b), Article 12 of the Philippines-Japan tax treaty. Furthermore, under Section 108 (A) of the Tax Code, the royalties paid to Ajinomoto for the use by Ajinomoto Philippines of the relevant know-how, secret formula and trademark in the Philippines are subject to value-added tax ("VAT"), to wit: IAaCST "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, 4 raise the rate of value-added tax to twelve percent (12%) . . ." Relative thereto, Ajinomoto Philippines shall withhold VAT on the fees at the rate of 10 percent (before February 1, 2006) and 12 percent (beginning February 1, 2006) before remitting them to Ajinomoto. Ajinomoto 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 its accompanying proof of payment shall serve as documentary substantiation for Ajinomoto Philippines' claim of input VAT on the royalties; otherwise, if it is not a VAT-registered taxpayer, Ajinomoto Philippines may treat the 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. 5 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. As amended by 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 effective January 1, 2009. 2. April 15, 2009 is the fifteenth day after the filing of the TTRA on March 31, 2009. 3. Prior to January 1, 2005, the rates of income tax were 34 percent beginning January 1, 1998, 33 percent beginning January 1, 1999, and 32 percent beginning January 1, 2000, 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): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter the rate shall be thirty-two percent (32%)." 4. 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. 5. 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."