ITAD Ruling No. 039-04

April 28, 2004 ITAD RULING NO. 039-04 Philippines-Australia, Article 12; Sec. 28 (B) (4) NIRC BIR Ruling NO. ITAD-198-00 Sycip, Salazar, Hernandez & Gatmaitan Syciplaw-All Asia Capital Center 105 Paseo de Roxas 1226 Makati City Attention: Mr. Simeon Ken R. Ferrer Mr. Benedicto P. Panigbatan Gentlemen : This refers to your application for relief from double taxation dated January 10, 2002, on behalf of Twintech Holdings Pty., Ltd (Twintech), requesting a ruling that the remittances of rental payments by Trenchless Technologies Corporation (Trenchless) to Twintech for the use of a drilling machine are exempt from withholding tax pursuant to Article 5 & Article 7 paragraph (1) of the Philippines-Australia tax treaty. It is represented that Twintech is a nonresident foreign corporation duly organized and existing under the laws of Australia with mailing address at P.O. Box 273 Edgecliff; NSW 2027, Australia; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 23, 2001; that Trenchless is a domestic corporation engaged in laying fiber optic cables organized and existing under the laws of the Republic of the Philippines with principal office at No. 21 Linao St.,Sta. Mesa Heights, 114 Quezon City, Philippines; that Trenchless entered into a Contract of Lease dated August 22, 2001 with Twintech for the lease of Fockerspergerer FSP 17 plough and winch unit ("leased property");that upon the execution of the lease contract, Twintech agreed that Trenchless shall immediately execute a sublease arrangement with Mr. Sotero V. Torralba III, doing business under the name and style "SVT Enterprises" (SVT);that SVT shall undertake to be consistent with, and shall execute the sublease arrangement according to the intents, purposes, terms and conditions of the contract, as well as adopt the same formula for computing the rental payments as provided for in the contract; and that in consideration for the lease, Trenchless shall pay Twintech a monthly rental based on the following formula: Gross Rental received from Sub-Lessee pursuant to Section 3(a) and Section 3(b) of the Sub-Lease. xxx Less: Commission due to the Lessee calculated in accordance with the Table 1 below xxx Table 1 Commission due to the Lessee Turnover per month Rate of Commission Up to Ps 2,650,000 3% Ps 2,650,000 to Ps 5,300,000 4% Ps 5,300,001 to Ps 7,950,000 5% Ps 7,950,001 to Ps 10,600,000 6% Ps 10,600,001 - 7% Less: Philippine Pesos 265,000 representing monthly logistic fee payable to the Lessee xxx Less: Any amount paid by the Lessee at the request of and on the behalf of the Lessor pursuant to Section 6(d), Section 6(e) and Section 12 xxx Amount of monthly rental payable to Twintech xxx ====== In reply, please be informed that Article 12 of the Philippines-Australia tax treaty provides, viz : "Article 12 "ROYALTIES "1. Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. "2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed a) 15 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; and b) in all other cases, 25 per cent of the gross amount of the royalties. "3. The term 'royalties' in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; b) the use of, or the right to use, any industrial, commercial or scientific equipment ;(emphasis supplied) c) the supply of scientific, technical, industrial or commercial knowledge or information; d) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a),any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); e) the use of, or the right to use (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; or (f) total or partial forbearance in respect of the use of a property or right referred to in this paragraph. xxx xxx xxx." Based on the aforequoted provisions, the abovementioned rental payments are covered by the term "royalties" and as such are subject to the preferential rate not exceeding twenty-five percent (25%) of the gross amount of royalties. However, Section 28(B) of the Tax Code of 1997 provides, viz : "Sec. 28. Rates of Income Tax on Foreign Corporation . "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporation . "xxx xxx xxx "(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other equipment. Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one half percent (7%) of gross rentals or fees. "xxx xxx xxx" In view thereof, this Office hereby rules that the rental income derived by Twintech from its lease transaction with Trenchless is subject to tax at the rate of seven and one-half percent (7%) based on gross rentals, the same not having exceeded the twenty five (25%) rate imposed on the gross amount of royalties under the Philippines-Australia tax treaty, contrary to your opinion that the said rental payments may be exempted from income tax pursuant to Articles 5 and 7 of the same tax treaty. ( BIR Ruling No. DA-ITAD 198-00 dated December 7, 2000 ) Moreover, the rental payments by Trenchless for the lease of the drilling machine provided by Twintech are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, Trenchless, 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 Twintech. In remitting the VAT withheld, Trenchless shall use BIR Form No. 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 sufficient basis for the claim of input tax to be applied against the output tax that may be due from Trenchless, if it is a VAT-registered taxpayer. In case Trenchless 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, Trenchless is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of Twintech, the first three copies thereof to be given to Twintech and the fourth copy to be retained by Trenchless as its file copy. [ Section 4 & 6, Revenue Regulations No. (RR) 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002 ] This ruling is issued on the basis of the facts as represented. 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. aCIHcD Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service