BIR Ruling [DA-181-06]

March 27, 2006 BIR RULING [DA-181-06] 106; 108; RMC 44-2005; VAT Ruling 020-99 United Laboratories, Inc . 66 United Street, Mandaluyong City Attention: Mr. Apolonio J. Matic CSVP-Finance and Treasury Gentlemen : This refers to your letter dated October 10, 2005 requesting for confirmation of your opinion that royalty payments for the use of a copyright over a software shall be subject to 10% VAT pursuant to Sections 106 and 108 of the NIRC, as amended. It is represented that on May 31, 2005, United Laboratories ("UNILAB" for brevity), a Philippine corporation, entered into a contract with SAP AKTIENGESELLSCHAFT ("SAP-AG" for brevity), a German corporation with office at Neurottstrasee 16, D-69190 Walldorf, Germany; that the contract entered into pertains to application of License for the use of SAP software; that the objectives of the new Software application are to support the business transactions processing using a next generation Enterprise Resource Planning System to achieve better cost efficiency, to provide timely and reliable financial information that will be used for management's decision-making and to support operations in the areas of Finance and Treasury, Sales and Distribution, Material Management and Supply Chain; that as provided in the contract, SAP-AG shall grant License to Use SAP's propriety Software to UNILAB; and that the SAP's Software or License includes: 1. the Software and Documentation which includes benchmark results, manuals, program listings, data structures, flow charts, logic diagrams, functional specifications; DcaCSE 2. the concepts, techniques, ideas, and know-how embodied and expressed in the Software and; 3. information reasonably identifiable as the confidential and propriety information of SAP or Licensee or their licensors excluding any part of the SAP or Licensee Proprietary Information which; 3.1 is or becomes publicly available through no act or failure of the other party; 3.2 was or is rightfully acquired by the other party from a source other than the disclosing party prior to receipt from the disclosing party or; 3.3 becomes independently available to the other party as a matter of right. In reply, please be informed that for every sale or exchange of services, including the use or lease of properties, there shall be levied, assessed and collected a value-added tax equivalent to ten percent (10%) of the gross receipts. The phrase 'sale or exchange of services' includes the lease or the use of or the right or privilege to use any copyright, patent, design, or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right. [Sec. 108, Tax Code of 1997, as amended] Since the payments made by UNILAB to SAP-AG represent payments for the use of a copyright over a software, such payment shall be subject to the 10% VAT pursuant to Sections 106 and 108 of the 1997 Tax Code, as amended. Accordingly, UNILAB shall withhold the creditable withholding VAT on said royalty payments on behalf of SAP-AG by filing a separate VAT return for and on behalf of the latter. [Sec. 7, Revenue Memorandum Circular No. 44-2005] With respect to the aforementioned payments for the use of a copyright over a software, the same shall be treated as royalty payments. Article 12(3) of the RP-Germany Tax Treaty defines 'royalty' as payment of any kind received as a consideration for the use of, or the right to use ". . . patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment . . .". Hence, the said payments/fees payable to SAP-AG fall under this definition. TDAHCS Furthermore, as regards the issue on royalties, Article 12(2)(a) of the RP-Germany Tax Treaty provides that royalties arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines, but the tax so charged shall not exceed 15% of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films or tapes for television or broadcasting. (VAT Ruling No. 020-99 dated March 4, 1999) In view of the foregoing, this Office hereby confirms your opinion that the royalty payments made by UNILAB to SAP-AG arising from the use of, or the right to use, the SAP Software shall be subject to 10% VAT and preferential tax rate not to exceed 15% of the gross amount of royalties. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service