ITAD Ruling No. 025-04

March 11, 2004 ITAD RULING NO. 025-04 RP-Japan, Article 11 &12 NIRC, Sec. 180 BIR Ruling No. DA-ITAD-104-01 JGC Philippines, Inc. JGC Phil. Bldg., 2109 Prime St. Madrigal Business Park, Ayala Alabang 1780 Muntinlupa City Attention: Ms. Eugene K. Baria VP/Administration Division Manager Gentlemen : This refers to your letter dated December 2, 2003 requesting confirmation of your opinion that the royalty and interest payments made by your company, JGC Philippines, Inc. (JPHIL), to JGC Corporation (JGC), under the Trademark Licensing Agreement and Loan Agreement, are both subject to the preferential withholding tax rate of 10 percent (10%) pursuant to Articles 11 and 12 of the RP-Japan tax treaty. It is represented that JGC is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office address at Yokohama World Operations Center, 2-3-1, Minato Mirai, Nishi-ku, Yokohama, Japan that JGC is registered as a corporation licensed to do business in the Philippines through its Manila branch, JGC Corporation Manila ROHQ (JGC-Manila),as verified by the Securities and Exchange Commission (SEC) dated October 23, 2003; that JPHIL is a domestic corporation duly organized and existing under Philippine laws engaged in the business of providing engineering services; that JPHIL was granted a pioneer status as a NEW IT service firm in the field of Information Technology Services [engineering, procurement and construction services (EPC Services)] by the Board of Investments (BOI) under Certificate of Registration No. 2001-024 dated March 6, 2001; that on April 1, 2002, JGC and JPHIL entered into and executed a Trademark Licensing Agreement (Licensing Agreement),for a period of 5 years, whereby the former grants and assigns to latter the non-exclusive use of JGC's trademarks in all of JPHIL's business transactions, sales promotion, and project execution here and abroad; that said License Agreement is registered with the Intellectual Property Office under Certificate of Compliance No. 5-2002-00158 dated January 31, 2003; and that in consideration of the aforementioned rights conferred to, JPHIL shall pay JGC royalty in the amount of US$500,000 for the year 2002 and for the year 2003 and thereafter, the amount of royalty shall be determined later. Moreover, it is also represented that on September 27, 2000, a Loan Agreement was entered into by and between JGC and JPHIL whereby the former agreed to lend the latter the aggregate amount of Three Hundred Thirty Million Japanese Yen (JPY330,000,000.00),with an interest rate of 6 months TIBOR plus 0.7% per annum, for each interest period; that JGC-Manila, the Philippine branch of JGC, has no participation whatsoever, directly or indirectly, to the above Licensing or Loan Agreements between JGC and JPHIL, and that the income derived by JGC from said transactions is neither attributable to JGC-Manila nor paid or coursed through the latter since payments are directly remitted to JGC, per certification dated January 26, 2004 issued by the duly appointed resident agent of JGC-Manila. In reply, please be informed that Articles 11 and 12 of the RP-Japan tax treaty provide as follows: "Article 11 1. Interest 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 interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; b) 15 per cent of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest 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 Japan, who is the beneficial owner of the interest, shall not exceed 10 per cent of the gross amount of the interest .(emphasis supplied) "xxx xxx xxx" 5. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. 6. The provisions of paragraphs 1, 2 and 3 above shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply." "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; b) 25 per cent of the gross amount of the royalties in all other cases. 3. Notwithstanding the provisions of paragraph 2, 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 Japan, who is the beneficial owner of the royalties shall not exceed 10 per cent of the gross amount of the royalties .(emphasis supplied) 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply the beneficial owner 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 Contracting State independent personal 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 case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above-quoted provisions, the royalty payments will be taxed at a preferential rate not exceeding ten percent (10%) if the payor is a Philippine Board of Investments (BOI)-registered enterprise engaged in preferred pioneer areas of investment, fifteen percent (15%) if the payments are in respect of the use of or the right to use cinematograph films and films or tapes for radio of television broadcasting, and in all other cases, twenty-five percent (25%) of the gross amount of royalties. On the other hand, interest payments will be taxed at a preferential rate not exceeding ten percent (10%) if the payor is a BOI-registered enterprise engaged in preferred pioneer areas of investment or if the interest is paid in respect of Government securities, bonds or debentures, and 15% per cent of the gross amount of the interest in all other cases. However, the said preferential rates shall not apply if the beneficial owner of the interest or royalties carries on business in the Philippines through a permanent establishment and the right or property in respect of which the interest or royalties are paid is effectively connected with such permanent establishment or fixed base. In the instant case, while the JGC maintains a Philippine branch, it is represented that the said branch is not privy and does not have any participation whatsoever in the negotiation and implementation of the License and Loan Agreements so that any income derived by JGC independently of its Philippine Branch shall be considered income of JGC alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989),pertinently quoted hereunder: ''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. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis ours) Therefore, since JPHIL is a BOI-registered enterprise and engaged in preferred pioneer area of investment, and that the interest and royalty income are not effectively connected with JGC-Manila as the latter is not privy to the transactions between JGC and JPHIL, this Office is of the opinion and so holds that the royalty and interest payments by JPHIL to JGC are both subject to the preferential withholding tax rate of 10% of the gross amount of royalty and interest pursuant to Articles 11(3) and 12(3) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD-104-01 dated October 30, 2001 ) Moreover, the royalty payments are subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, JPHIL being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT before making any payment to JGC. In remitting the VAT withheld, JPHIL shall use BIR Form 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by JPHIL upon filing its own VAT, if it is a VAT-registered taxpayer. In case JPHIL is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as "expense" or "asset" whichever is applicable. In addition, JPHIL is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of JGC, the first three copies thereof to be given to JGC and the fourth copy to be retained by JPHIL 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 ] aEAcHI Finally, the Loan Agreement entered into by and between JGC and JPHIL is subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service