ITAD Ruling No. 067-04

July 9, 2004 ITAD RULING NO. 067-04 Articles 5 (Permanent Establishment), 7 (Business Profits), 12 (Royalties), and 15 (Dependent Personal Services) Philippines-Netherlands tax treaty BIR Ruling Nos. DA-ITAD 40-04 and DA-ITAD 176-02 Jardine Schindler Elevator Corporation 2307 Pasong Tamo Extension Makati City Attention: Mr. John Free General Manager Mr. Alan Molina Finance Manager Gentlemen : This refers to your letter dated April 6, 2004 requesting confirmation that royalties paid by Jardine Schindler Elevator Corporation (Jardine Philippines) to Jardine Schindler (Pacific) BV (Jardine Netherlands) are subject to 15 percent income tax under the existing Philippines-Netherlands tax treaty. It is represented that Jardine Netherlands is a foreign company organized and existing under the laws of the Netherlands with principal office at Diepenbrockstraat 19, 1077 VX Amsterdam, The Netherlands; that Jardine Netherlands is not registered either as a corporation or as a partnership and has not been licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration issued by the Securities and Exchange Commission on April 12, 2004; that, on the other hand, Jardine Philippines is a domestic company organized and existing under the laws of the Philippines with principal office at 2307 Pasong Tamo Extension, Makati City, Philippines; that Jardine Netherlands and Jardine Philippines are both engaged primarily in the sale, installation, maintenance, modernization, refurbishment of elevators, dumbwaiters, escalators, passenger conveyors, and auxiliary equipment; that on November 12, 2003, Jardine Netherlands and Jardine Philippines entered into a License and Technical Assistance Agreement (Agreement) where Jardine Netherlands grants Jardine Philippines the exclusive license to use in the Philippines the Schindler Rights for or in connection with the sale, installation, servicing, refurbishment, modernization, and manufacture of the Schindler Products; that the Schindler Products include elevators, dumbwaiters, escalators, passenger conveyors, and auxiliary equipment, which (i) were designed or manufactured or otherwise dominantly contributed to by any member of the Schindler Group or were designed or manufactured by any party not belonging to the Schindler Group but acting on behalf of a member of the Schindler Group, and (ii) bear or are designed to bear a Schindler trademark; that in consideration, Jardine Philippines will pay Jardine Netherlands a royalty of five percent (5%) (or at any other rate as may be agreed mutually from time to time) based on Jardine Philippines' turnover of the Schindler Products; that aside from the license, Jardine Netherlands agrees to provide to Jardine Philippines (at its request and at its cost and expense) technical support and assistance relative to the use of the license; that the Agreement (signed on November 12, 2003) has retroactively entered into force on January 1, 2003 and shall continue to be in force for fourteen (14) years or until December 31, 2016; that the Agreement is being renewed every year, the last one being on February 17, 2004; and that the Agreement complies with the provisions of Sections 87 and 88, Chapter IX, Part II of the Intellectual Property Code (Republic Act No. 8293) on Voluntary Licensing as confirmed by the Certificate of Compliance No. 5-2003-00132 issued by the Intellectual Property Office on March 16, 2004. In reply, please be informed that the royalties to be paid by Jardine Philippines to Jardine Netherlands for the exclusive license to use the Schindler Rights in the Philippines are royalties within the meaning of the term under paragraph 4, Article 12 (Royalties) of the Philippines-Netherlands tax treaty, to wit: "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 or tapes for radio or television broadcasting, any patent, trademark, 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. TAEcCS "xxx xxx xxx" Under the Agreement, the "Schindler Rights" means all know-how, specialist technical knowledge and industrial information and techniques and all patents, inventions, rights in designs, copyrights, and similar proprietary rights and all other intellectual property (including registrations and applications for registration therefor) owned by the Schindler Group which relate to or are used for the business in the Philippines together with any future improvements, additions or modifications to such rights. Accordingly, payments for the use of the Schindler Rights are, in fact, altogether, payments for the use of, or the right to use, any copyright of scientific work, patent, trademark, design or model, and information concerning industrial, commercial or scientific experience (know-how) . This being so, the subject royalties to be paid by Jardine Philippines to Jardine Netherlands are subject to taxation under Article 12 of the Philippines-Netherlands tax treaty, to wit: "Article 12 ROYALTIES "1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. ECTIHa "xxx xxx xxx" Paragraph 1 states that the subject royalties arising in the Philippines and paid to Jardine Netherlands may be taxed in the Netherlands, where the latter is a resident. Paragraph 2 states that the subject royalties may also be taxed in the Philippines, but the tax so charged shall not exceed: (a) 10 percent of the gross amount of the royalties if they are paid by a registered enterprise that is engaged in preferred areas of activities in the Philippines, or (b) 15 percent of the gross amount of the royalties in all other cases. Since Jardine Philippines ,the payor of the royalties, is not a registered enterprise contemplated in subparagraph (a),this Office is of the opinion and so holds that the subject royalties to be paid by Jardine Philippines to Jardine Netherlands are subject to 15 percent income tax, based on the gross amount of the royalties. ( BIR Ruling No. DA-ITAD 40-04 dated May 3, 2004 ) On the other hand, with respect to the service fees to be paid by Jardine Philippines to Jardine Netherlands for the technical support and assistance the latter will provide relative to the use of the license (if Jardine Philippines so requests, at its cost and expense),please be informed that the subject service fees are generally business profits subject to taxation under Article 7 (Business Profits) of the Philippines-Netherlands tax treaty: "Article 7 BUSINESS PROFITS "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. "xxx xxx xxx" Paragraph 1 states that the subject service fees arising in the Philippines and derived by Jardine (Netherlands) may be taxed in the Philippines if they are attributable to a permanent establishment which Jardine (Netherlands) has in that country. The term "permanent establishment," as defined in paragraphs 1 and 2, Article 5 (Permanent Establishment) of the same tax treaty, means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes, for example, a place of management, a branch, and an office. Aside from fixed places of business, the same paragraph 2 treats as a permanent establishment ,the furnishing of services including consultancy services in a Contracting State by an enterprise (through employees or other personnel thereof) of the other Contracting State, where it continues for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Accordingly, the provision by Jardine Netherlands (through personnel thereof) to Jardine Philippines of technical support and assistance relative to the use of the license will constitute a permanent establishment if this activity is carried out in the Philippines for more than 183 days within any twelve-month period. ( BIR Ruling No. DA-ITAD 176-02 dated October 9, 2002 ) With respect to the remuneration of Jardine Netherlands' personnel who will provide the technical support and assistance, such remuneration is generally subject to Philippine income tax, unless the following conditions set forth in paragraph 2, Article 15 of the Philippines-Netherlands tax treaty are all complied with, to wit: "Article 15 DEPENDENT PERSONAL SERVICES "1. Subject to the provisions of Articles 16, 18, 19 and 20 salaries, wages and other similar remuneration derived by a resident of one of the States in respect of an employment shall be taxable only in that State unless the employment is exercised in the other State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. TAECSD "2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of one of the States in respect of an employment exercised in the other State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. "xxx xxx xxx" Paragraph 2 states that the subject remuneration will be exempt from tax if: (a) the employees are present in the Philippines for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; (b) the remuneration is paid by an employer who is not a resident of the Philippines; and (c) the remuneration is not borne by a permanent establishment which the Jardine Netherlands has in the Philippines. The second and third conditions are apparently both complied with by reason that the employer, Jardine Netherlands ,is not a resident of the Philippines and that it does not have a permanent establishment ( i.e. ,a fixed place of business) in the Philippines as confirmed by the relevant Certification from the Securities and Exchange Commission. Accordingly, if the length of stay of the subject employees will not exceed an aggregate of 183 days in the fiscal year concerned (first condition),then their remuneration shall be exempt from Philippine income tax; otherwise, the remuneration is taxable. ( BIR Ruling No. DA-ITAD 176-02 dated October 9, 2002 ) Finally, Section 108(A)[(1) and (2)] of the National Internal Revenue Code of 1997 states that "the use of or the right or privilege to use any copyright, patent, design or model, trademark or other like property," "the supply of scientific, technical, industrial or commercial knowledge or information," and "the supply of any assistance that is ancillary and subsidiary and is furnished as a means of enabling the application or enjoyment of such (intangible) property or information" all fall within the definition of sale or exchange of services subject to 10 percent value-added tax (VAT).Accordingly, the subject license fees and the subject service fees paid by Jardine Philippines to Jardine Netherlands are both subject to 10 percent VAT. ( BIR Ruling No. DA-ITAD 40-04 dated May 3, 2004 ) With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002 provide that the resident person making the payments (Jardine Philippines) to a nonresident person (Jardine Netherlands) ,shall be responsible for the withholding of the 10 percent VAT on such payments before remitting them to Jardine Netherlands .In remitting to the Bureau of Internal Revenue the VAT withheld on such payments, Jardine Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld).If a VAT-registered taxpayer, Jardine Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If not a VAT-registered taxpayer, Jardine Philippines may include as part of the cost of the license granted and the services furnished to it by Jardine Netherlands ,the VAT consequently shifted or passed on to it and may treat such VAT either as expense or asset ,whichever is applicable. In addition, upon Jardine Netherlands' request, Jardine Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306),the first three copies to be given to Jardine Netherlands and the fourth copy to be retained by Jardine Philippines as its file copy. 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