BIR Ruling

February 12, 1970 Messrs. Sycip, Gorres, Velayo & Co. P. O. Box 589 Manila Gentlemen : This refers to your letter dated January 9, 1970 requesting a ruling on the question of whether or not the fees which will be paid and remitted by your client, Kraft Foods, Inc. (Philippines) to Kraft Food, Ltd., in Australia in accordance with an agreement executed on December 31, 1965 whereby Kraft Foods, Ltd. shall furnish to Kraft Foods, Inc. technical know-how with respect to the food products manufacturing business, are subject to income tax. cdti It is represented that Kraft Foods, Ltd. (hereinafter referred to as Kraft Foods Australia) is a non-resident foreign corporation duly incorporated under the laws of the state of Victoria, Australia. It is not engaged in trade or business in the Philippines. On December 31, 1965 an agreement was executed by and between Kraft Foods Australia and Kraft Foods Philippines at Chicago, Illinois, U.S.A.; whereby the former shall furnish the latter technical know-how with respect to the food products manufacturing business, by sending written materials regarding the food products manufacturing business. It further provides that any know-how which Kraft Foods Australia has or acquires rights from third parties, Kraft Foods Philippines shall have the right to use the same to the extent that the former is empowered to confer such rights. It also obligates Kraft Foods Philippines that all developments or information disclosed to it shall be held by it in confidence and not to be disclosed to third parties. (Paragraphs 1 (a) and (c), 3 and 4 of the Agreement); that in consideration of the technical know-how to be furnished by Kraft Foods Australia to Kraft Foods Philippines, the latter shall pay the former a fee at the rate of four-tenths of one per cent (0.4%) of the proceeds of the sale of branded items and one-eight of one per-cent (0.125%) of the proceeds of the sales for bulk and unbranded items for each fiscal quarter. (Paragraph 2 (a) of the Agreement) In reply thereto, I have the honor to inform you that Section 24(b)(1) of the Tax Code as amended by Republic Act No. 5431 provides that a foreign corporation not engaged in trade or business in the Philippines including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines, shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines, as interests, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed or determinable annual, periodical or casual gains, profits, and income, and capital gains. Provided: however, That premiums shall not include reinsurance premiums. cd Section 37(a)(4) of the Tax Code treats as income from sources within the Philippines, rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the Philippines patents, copy-rights, secret processes, and formulas, goodwill trademarks, trade brands, franchise and other like property. The fees which are being paid by Kraft Foods Philippines to Kraft Foods Australia in consideration of the technical know-how with respect to the food products manufacturing business furnished by the latter constitute remuneration for technical services. They are also in the nature of royalties for the use of or for the privilege of using in the Philippines secret processes and formulas. In view thereof, this Office is of the opinion and so holds that the fees in question remitted to Kraft Foods Australia are income from sources within the Philippines by said foreign corporation subject to the 35% withholding tax prescribed by Section 24(b)(1) in relation to Section 53(b)(2), both of the Tax Code, as amended. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue