BIR Ruling [DA-095-99]

February 15, 1999 BIR RULING [DA-095-99] Quisumbing Torres & Evangelista 11th Floor, Pacific Star Building Makati Ave. Cor. Sen. Gil J. Puyat Ave. Makati City 1200 Attention: Atty . Jose R . Sandejas and Atty . Ariel R . Arriola Gentlemen : This refers to your letter dated August 6, 1998 requesting., in effect, for a ruling that royalties payable by a domestic corporation to a US corporation shall be subject to the preferential tax rate of 10% under Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(b) of the RP-West Germany Tax Treaty. aisadc It is represented that Schering-Plough Corporation is a corporation organized and existing under the laws of the Republic of the Philippines with office address at 4th Floor Mareic Building, Tordesillas Street, Salcedo Village, Makati City; that Schering-Plough International, Inc. is a corporation organized and existing under the laws of the State of Delaware, U.S.A. with office address at 2000 Galloping Hill Road, Kenilworth, New Jersey, U.S.A.; that Schering-Plough Corporation and Schering-Plough International, Inc. entered into a License Agreement dated April 1, 1994 and effective until 31 March 2004; that in consideration of the privileges, services, benefits and rights conferred upon Schering-Plough Corporation under the License Agreement, Schering-Plough Corporation pays Schering-Plough International, Inc. a royalty of 5% on the total value of Schering-Plough Corporation's net sales; and that the License Agreement was duly registered with and approved by the Technology Transfer Registry of the Bureau of Patents, Trademarks and Technology Transfer. In reply, please be informed that under the most favored nation provision of the RP-US Tax Treaty (Article 13, paragraph 2(b)(iii), the tax imposable on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippines tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a Third State. Article 12, paragraph 2(b) of the RP-West Germany Tax Treaty, effective January 1, 1985, provides that royalties arising in the Philippines and paid to a resident of West Germany may also be taxed in the Philippines, but the tax so charged shall not exceed 10% of the gross amount of royalties arising from the use of or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. The said treaty also provides that for as long as the transfer of technology under Philippine law is subject to approval, the limitations of the tax rate mentioned under Article 12(2)(b) of the RP-Germany Tax Treaty shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. Such being the case, and inasmuch as the License Agreement between Schering-Plough International, Inc. and Schering-Plough Corporation has been approved by the Bureau of Patents, Trademarks and Technology Transfer of the Department of Trade and Industry, royalties arising in the Philippines and payable to Schering-Plough International, Inc., are subject to the Philippine tax at the rate of 10% pursuant to Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(b) of the RP-West Germany Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same condition as provided in Section 50(b) of the Tax Code, as amended. (BIR Ruling No. 002-90 dated January 4, 1990) cdtech Moreover, the remittance by Schering-Plough Corporation to Schering-Plough International, Inc. of 5% franchise fees arising in the Philippines based on gross sales shall be subject to 10% value-added tax pursuant to Section 102(a)(1) of the Tax Code, as amended by Republic Act No. 7716. Section 4.102-1(b) of Revenue Regulations No. 7-95, implementing R.A. 7716, provides, viz: "SEC. 4.102-1. Value-Added Tax on the sale of services and use or lease of properties. (a) . . . "(b) The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." In view thereof, Schering-Plough Corporation shall, before making payment of royalties to Schering-Plough International, Inc., withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of the said non-resident foreign corporation. (Section 4.110-3(b) of Revenue Regulations No. 7-95). The duly validated VAT declaration/return is sufficient evident for Schering-Plough Corporation in claiming input tax credit. (BIR Ruling No. 083-98 dated May 28, 1998) 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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)