BIR Ruling

September 30, 1968 Messrs. Siguion Reyna, Montecillo, Belo and Ongsiako A. Soriano Bldg., 877 Paseo de Roxas Corner Ayala Ave., Makati, Rizal Gentlemen : This refers to your letter dated March 27, 1968 requesting confirmation that the royalty payments made by your client Vick International, Inc., a domestic corporation, to Richardson-Merrell, Inc., a non-resident foreign corporation not engaged in trade or business in the Philippines for the use in the Philippines by the former of the patents, trade marks, secret formulas and processes owned by the latter are deductible for income tax purposes. It appears that Richardson-Merrell, Inc. is the controlling stockholder your client, Vick International, Inc., it owning 99.5% of your client's capital stock. Because of this circumstance, it is felt that the royalty payments partake of the character of dividend payments and, therefore, not deductible as business expense. In effect it is theorized that the two corporations are one and the same corporation and, therefore, the corporate personality of one should be disregarded. In reply, I have the honor to inform you as follows: It had been held that "Deductibility of rents or royalties paid to stockholders depends upon whether they are in fact payments for the use of property owned by the stockholder or are merely a means for distribution of profits." (Par. 2508, P-H, Vol. I, 1963) That patents, copyrights, and trade marks are property is also unquestionable. Therefore, it such properties are in fact used in the Philippines, the payment of royalties to the owners thereof is well founded and should be recognized. In the light of the foregoing, and since the patents, trade marks, secret formulas and processes owned by Richardson-Merrell, Inc. are actually used in the Philippines by Vick International, Inc. as licensee thereof, it is the opinion of this Office as it had previously held in 1965 that the royalties paid by Vick International, Inc. to Richardson-Merrell, Inc. are deductible expenses. "Royalties are properly deductible business expenses even if paid to stockholders of the corporation." (Differential Steel Car Co. 16 TC 413; Webb Press Co. Ltd. 3 BTA 247; William Bailey Co. V. Comm. Int. Rev., 15 TC 468) However, considering that Richardson-Merrell, Inc. is a non-resident foreign corporation not engaged in trade or business in the Philippines, your client, Vick International, Inc. should withhold from such payments 30% of the amount thereof as income tax pursuant to Section 54 of the Tax Code. Starting July 1, 1968, your client should withhold income tax due from the aforenamed corporation at the rate of 35% pursuant to R.A. No. 5423. lexlib Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue