BIR Ruling [DA-160-99]

March 16, 1999 BIR RULING [DA-160-99] Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . George J . Lavadia Principal Tax and Corporate Services Department Gentlemen : This refers to your letter dated September 22, 1998 requesting on behalf of your client, B & C Philippines, Inc . (B&C) , for a ruling confirming your opinion that the royalties paid by it to Bain & Company, Inc . (Bain) , a non-resident foreign corporation organized and existing under the laws of Massachusetts, USA shall be subject to Philippine income tax at the rate of 10% under the RP-US Tax Treaty. It is represented that B & C is a domestic corporation duly organized and existing under the laws of the Philippines; that B & C entered into a royalty agreement with Bain; that the royalty agreement is for the license to use in the Philippines the professional techniques and know-how, both computerized and not, which have been developed by Bain relative to consulting systems, strategies, and techniques, as well as the Experience Center, client video workshops, worldwide database, and professional manuals; that in consideration for the grant of such technology and privilege, Bain shall be entitled to receive royalty payments; and that the agreement has been certified under Certificate No. 5-1998-00028 by the Documentation, Information and Technology Transfer Bureau of the Intellectual Property Office to be in compliance with Sections 87 (Prohibited Clauses) and 88 (Mandatory Provision) of the Intellectual Property Code. In reply, please be informed that pursuant to Article 13(1)(2)(a)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(b) of the RP-West Germany Tax Treaty, pertinent portion of which reads: "ARTICLE 13 Royalties "1. . . . "2. However, the tax imposed by that Contracting State shall not exceed "a) In the case of the Philippines, the least of: "(i) 25 percent of the gross amount of the royalties, "(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and "(iii) The lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State; and "b) In the case of the United States, 15 percent of the gross amount of the royalties. "xxx xxx xxx" Moreover, Article 12 (2)(b) of the RP-West Germany Tax Treaty provides, viz: "ARTICLE 12 Royalties "1. . . . "2. However, such royalties may also be taxed in the Contracting State which they arise, and according to the law of that State, but the tax so charged shall not exceed: "a) . . . "b) 10 percent of the gross income 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. "For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) 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." cdti xxx xxx xxx Accordingly, the royalties your client would be paying to Bain, a non-resident U.S. corporation, pursuant to its Agreement with the latter are subject to the 10% withholding tax under Article 13(2)(a)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(b) of the RP-West Germany Tax Treaty. Under the most favored nation clause provision of the RP-US Tax Treaty 13(2)(a)(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 the Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. Article 12(2)(b) of the RP-West Germany Tax Treaty 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 equipments, or for information concerning industrial, commercial, or scientific experience. The 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 (b) shall, in case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by Philippine competent authorities. Such being the case, and inasmuch as the royalty agreement for the license to use in the Philippines the professional techniques and know-how, both computerized and not, which have been developed by Bain relative to consulting systems, strategies, and techniques, as well as the Experience Center, client video workshops, worldwide database, and professional manuals between your client and Bain has been duly registered and approved by the Documentation, Information and Technology Transfer Bureau of the Intellectual Property Office (IPO) on August 12, 1998 under Certificate of Compliance No. 5-1998-00028, royalties arising in the Philippines and payable to Bain, a non-resident foreign corporation based in Massachusetts, USA, are subject to the Philippine tax rate of 10% because this rate appears in the RP-West Germany Tax Treaty pursuant to Article 13(2)(a)(iii) of the RP-US Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same conditions as provided in Section 57 of the Tax Code of 1997. (BIR Ruling No. DA-391-98 dated August 25, 1998) Moreover, pursuant to R. A. No. 7716, otherwise known as the Expanded Value-Added Tax Law, such royalty payments shall be subject to the 10% value-added tax. 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. cdtech Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)