ITAD Ruling No. 020-01

March 6, 2001 ITAD RULING NO. 020-01 RP-US; RP-Russia Section 28 (B) (1) Nu Skin Philippines, Inc . 15th Floor Octagon Center 41 San Miguel Ave., Ortigas Center Pasig City 1605 Attention: Alice L . Celis Asst. Finance Manager Gentlemen : This refers to your letter dated February 28, 2000 requesting for a ruling to the effect that the interest, royalties & license fees to be received by Nu Skin International, Inc . (NSI) from Nu Skin Philippines, Inc . (NSPI) be entitled to relief from double taxation provided under the RP-US Tax Treaty. It is represented that NSI is a corporation organized and existing under the laws of the State of Utah, U.S.A., engaged in the design, production and marketing of products and Sales Aids for distribution in the international markets through a network of independent distributors; that NSI authorized and appointed Nu Skin Hongkong, (NSHK), a branch of NSI in Hongkong, as its exclusive regional distributor of Products and Sales Aids in certain countries in the Asia Pacific region; that NSPI is the Philippine Branch (per SEC Registration No A1997-6813 issued by the Securities and Exchange Commission dated April 1997) of a corporation bearing the same name organized and existing under the laws of Delaware U.S.A.; that the line of business involves multi-level marketing of personal care products, which they import from NSI; that NSI grants NSPI the exclusive right and license to manufacture, distribute, make, have made, use and sell the products in the Philippines under the Licensing Sales Agreement and Trade Mark/Tradename Licensing Agreement per Certificate of Compliance No. 5-1998-0040 and 5-1998-0041 which were issued last March 26, 1999 by the Intellectual Property Office of the Department of Trade and Industry; that the Trademark/Tradename Licensing Agreement is valid only for a period of ten years from January 30, 1998 to January 29, 2008; that NSHK, on the other hand, appoints NSPI as its exclusive distributor for the sale and distribution of the Product and Sales Aids in the Philippines, under the Products' names, logos, and trademarks subject to all terms and conditions of the Wholesale Distributor Agreement; and that shipment of imported products come from NSI which invoices are billed and sent by NSHK and any outstanding payables at the end of each month has an interest-add on. In reply, please be informed that Article 13 of the RP-US Tax Treaty provides viz : "ARTICLE 13 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. However the tax imposed by that other Contracting State shall not exceed: a.) In the case of the United States, 15 percent of the gross amount of the royalties, and b.) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, and (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. xxx xxx xxx The "most favored nation" clause under Article 13(2)(b)(iii) of the RP-US Tax Treaty calls for the application of a Philippine Tax Treaty which provides for the lowest rate of the Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State, one of which is the RP-Russia Tax Treaty which Article 12 (Royalties) 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 State. 2. However; the royalties may also be taxed in the Contracting State in which they arise and according to the laws of the State but the tax so charged shall not exceed 15 percent of the gross amount of royalties." Such being the case, the royalties to be paid by NSPI to NSI under their Licensing Sales Agreement and Trademark/Tradename Licensing Agreement are subject to Philippine tax of fifteen percent (15%) of the gross amount of royalties in accordance with the provisions of RP-Russia Tax Treaty in relation to Article 13 paragraph 2(b)(iii) of the RP-US Tax Treaty. Moreover, under Section 108 of the 1997 Tax Code, the payment to be remitted by NSPI to NSI are subject to the 10% Value Added Tax. Accordingly, NSPI shall be responsible for the payment of VAT on such fees on behalf of NSI by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by NSPI as evidence in claiming input tax credit. (SEC. 4.102-1(b), Revenue Regulation No. 7-95) Considering that NSHK is the exclusive regional distributor of NSI for the sale and distribution of Products and Sales Aids in the Asia Pacific Region inclusive of the Philippines, NSHK entered into a Wholesale Distribution Agreement with NSPI which terms and conditions include, among others, that prices to be paid by NSPI to NSHK for Products and Sales Aids purchased hereunder shall be negotiated and determined on an arm's length basis and be adjusted from time to time as agreed by the Parties in writing; that NSPI shall pay the commercial invoices for Products and Sales Aids shipped under this Agreement in immediately available funds by wire transfer to a bank or banks designated by NSHK, or by such other means of payment agreed to by NSHK from time to time; that all purchases of Products and Sales Aids will be payable in Philippine Pesos with any exchange rate risk to be borne by NSHK; and that without limiting any of NSHK's other rights and remedies pursuant to this Agreement, amounts not paid within the time period set forth in the payment provisions herein shall bear interest at the prime interest rate as reported in The Wall Street Journal plus two percent (2%) for the full period outstanding. As such NSHK shall be deemed an income recipient and, therefore, NSHK shall be liable to tax on interest in this instance since the business transaction was made independently by NSHK and not directly by NSI. Moreover, NSHK shall also be liable to tax on other income that it may derive from the Philippines as NSI's exclusive regional distributor of Products and Sales Aids in the Asia Pacific Region. Tax treaties are applicable only to residents of the Contracting States and define a "resident of a Contracting State" as any person who is a resident of that State for tax purposes. Inasmuch as NSHK, a branch in Hongkong of NSI, U.S.A., is for tax purposes of Hongkong a resident thereof, NSHK cannot therefore invoke the provision of RP-US Tax Treaty. Furthermore, that the business transactions conducted by a branch is separate and distinct from the activities of the head office for tax purposes is recognized by the Supreme Court in the case of Marubeni vs. CIR, (G.R No. 76573 dated September 14, 1989) where it was enunciated as follows: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." In view thereof, since there is no existing tax treaty between the Philippines and Hongkong, the interest to be paid by NSPI to NSHK as well as such other income which NSHK may derive from the Philippines as distributor shall be subject to the applicable withholding tax as provided under Sec. 28 (B)(1) of the 1997 Tax Code, to wit: "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 under subparagraph 5(c). 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%)." This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue