BIR Ruling [DA-013-98]

January 23, 1998 BIR RULING [DA-013-98] Ayala Agricultural Development Corporation 32F Tower One, Ayala Triangle Ayala Avenue Makati City Attention: Atty . Renato O . Marzan Assistant Corporate Secretary Gentlemen : This refers to your letter dated December 1, 1997 requesting for confirmation of your opinion that the payments to be made by a subsidiary (the ''Commercial Company") to be formed by AYALA AGRICULTURAL DEVELOPMENT CORPORATION (AADC) to DEKALB GENETICS CORPORATION (DEKALB), for the sale and supply of foundation seeds are not considered as royalties subject to withholding tax. It is represented that AADC is a corporation duly organized and existing under the laws of the Republic of the Philippines, with business address located at Katanggawan, General Santos City; that it was organized for the purpose of dealing in agricultural activities and/or services, including farming and the production of all kinds of farm produce and other agricultural products and their by-products, and in the related services necessary to support agricultural production including marketing, merchandising, transporting, handling and storage of such agricultural products or by-products, and to acquire, hold, lease, develop, manage and administer any and all kinds of agricultural property; that AADC intends to form and organize a subsidiary under the laws of the Republic of the Philippines, for the purpose, among others, of producing agricultural products, including commercial corn seeds and their varieties; that DEKALB is a non-resident foreign corporation not doing business in the Philippines, duly organized and existing under the laws of the State of Delaware, United States of America, with principal office at 3100 Sycamore Road, Dekalb, Illinois, U.S.A.; that it is the leader in the field of producing, developing, conditioning and marketing of hybrid corn seeds; that AADC and DEKALB are negotiating for a Supply Agreement whereby DEKALB will supply the Commercial Company with foundation seeds, a non-food agricultural product in its original state, to be produced by the latter as commercial corn seeds for general seedling purposes, and to be sold to farmers in the Philippines; that under the proposed Supply Agreement, the parties will furnish each other, upon written request, such technical information or services, including promotional or sales materials, which may be useful in the growing, conditioning and selling of the commercial corn seeds; that the payment to be made to DEKALB under the proposed Supply Agreement is the consideration for the purchase of the foundation seeds, and not for the use of, or the right to use the patent, trademark, design or model, plan, secret formula or process of DEKALB; and that neither is the payment a consideration for any information concerning industrial, commercial or scientific experience. In reply, we confirm your opinion that to be considered as royalties, there must be a transfer in the country of technology, equipment or other property where the payee has proprietary interest. Affirmatively put, there must be transfer of scientific, technical, industrial or commercial information. (BIR Ruling No. 093-89 dated May 2, 1989). In the instant case, the sale and supply of said foundation seeds does not involve the transfer of technology, because DEKALB will not make available to the Commercial Company any technical information regarding the specification or formulation of the foundation seeds, and no protected or proprietary rights to the foundation seeds will be granted, transferred, or permitted to be transferred to the Commercial Company. The foundation seeds will be used solely by the Commercial Company for the purpose of producing commercial corn seeds, and cannot be used for replication or maintenance, making crosses, conventional breeding, genetic manipulation or transformation, and genetic analysis. Furthermore, the services and/or technical information will not be used in the course of producing or manufacturing the foundation seeds, but are related to the provision of technical support concerning the production, marketing and sale of the commercial corn seeds. Such being the case, the payment for the sale and supply of the foundation seeds to the Commercial Company under the proposed Supply Agreement is not considered as royalties subject to withholding tax. (BIR Ruling No. 1-90 dated January 4, 1990) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)