BIR Ruling

July 5, 1972 Messrs. Ungson & Ungson Attorneys-at-Law 504 Magsaysay Bldg. T.M. Kalaw, Ermita Manila Gentlemen : This refers to your letter dated June 23, 1972 requesting information as to the tax consequences of a transaction under a contract substantially summarized as follows. Consolidated Brick and Investments, Ltd., hereinafter referred to as Consolidated, is a foreign corporation domiciled in New Zealand licensed to do business in the Philippines. Consolidated owns 30% of the authorized capital stock of Mayon Ceramics Corporation, hereinafter referred to as Mayon, a domestic corporation registered with the Board of Investments as a pioneer enterprise for the manufacture of ceramics dinnerware. cdt Consolidated and Mayon entered into so-called joint venture agreement consisting of a management agreement, technical know-how agreement and marketing agreement. As managers, Consolidated assumes responsibility generally for the overall management of Mayon including the engagement and employment of, managers and staff; arranging the procurement and construction of plant buildings, equipment and services necessary in the manufacture of ceramic tableware by Mayon; control of manufacturing processes; the administration of Mayon and all negotiations and agreements with labor unions customers, suppliers and contractors; the packing, presentation promotion and advertising of the products of Mayon and the sale of these products within the Philippines and to export agents; and the expenditure of the operating funds of Mayon in accordance with approved budget. With the exception of some limitations requiring approval by the Board of Mayon, Mayon had delegated power and authority to Consolidated to enable it to carry out its obligations and responsibilities as managers. Under the Technical Know-How Agreement, Consolidated furthermore grants to Mayon the exclusive license to use Consolidated's technical know-how for the manufacture of ceramic tableware, including drawings, formulae and other tangible forms of such drawings; to train Filipino employees of the use of such know-how; to make available to Mayon its engineers to assist it in installing and operating the plant and equipment; to make available to Mayon a resident technical staff; and upon request of Mayon, to perform incidental testing and research into the properties of raw materials to be used in manufacture. Consolidated also grants to Mayon the exclusive right to use its trademarks and brand names in the manufacture of ceramics tableware. Consolidated shall undertake the export sale of 20% of the saleable product of Consolidated and to make available to Mayon its knowledge and experience of marketing methods and procedures. In consideration for all the foregoing services performed, Consolidated shall receive compensation as follows: For the disclosure of the technical know-how and the license granted to Mayon to use such know-how: (a) 2 of sales payable without regard to profit or loss; (b) % of sales times the percentage above 20% of profit after tax; and (c) The total of (a) and (b) shall not exceed 7% of sales. These fees are payable in New Zealand. For undertaking the export sale of 20% of the saleable product of Mayon; for lending its knowledge and experience in local marketing; and for Mayon's use of its designs, trademarks and patterns, fees equal to 2% of the selling price of ceramic products bearing Consolidated trademarks sold by Mayon in the Philippines and 5% of the selling price of all export products. In reply, I have the honor to inform you as follows: Being licensed to engaged in trade or business in the Philippines, and it appearing in fact that it shall manage the business of Mayon Ceramics corporation in the Philippines, Consolidated Brick and Pipe Investments Ltd. shall be considered a resident foreign corporation. As a resident foreign corporation engaged in trade or business in the Philippines, Consolidated shall be subject to income tax on its net income derived from all sources in the Philippines, such as the fees it shall derive for the services rendered to Mayon as indicated above and on any other income aside therefrom. (Section 24(b)(2) Tax Code) Being a resident foreign corporation, all remittances to Consolidated by Mayon representing management fees, dividends and reimbursement of expenses and even of royalties if any of the fees may be considered as such shall not be subject to the withholding tax. As managers, Consolidated shall be considered independent contractors. However, it shall not be subject to 3% tax on contractors' gross receipts pursuant to Section 191 of the Tax Code which exempts contractors of pioneer industries registered with the Board of Investments. Employees of Consolidated who shall come to render service in the Philippines shall be considered non-resident aliens engaged in trade or business in the Philippines. They shall be subject to income tax on their salaries and other emoluments and on any other income derived by them in the Philippines determined in accordance with the rate schedule prescribed by Section 21 of the Tax Code. Being considered engaged in trade or business in the Philippines, the salaries of said employees of Consolidated shall not be subject to the withholding tax. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue