BIR Ruling [DA-265-98]

June 24, 1998 BIR RULING [DA-265-98] Quisumbing Torres & Evangelista 11th Floor, Pacific Star Building Makati Ave. cor. Sen. Gil J. Puyat Ave. Makati City 1200 Attention: Attys . Natividad B . Kwan and Elizabeth B . Opea Gentlemen : This refers to your letter dated January 20, 1998 requesting on behalf of your client, Tyson Foods, Inc. (TFI), for a ruling confirming your opinion that the royalties to be received by your said client from Fil-Am Foods, Inc. (FAFI), under their Technology License and Technical Assistance Agreement is subject to Philippine income tax at the rate of 10% pursuant to the provisions of Article 13(2) of the RP-US Tax Treaty in relation to Article 12 of the RP-West Germany Tax Treaty. LLphil It is represented that TFI is a corporation organized and existing under the laws of the State of Delaware, U.S.A.; that it does not carry on business in the Philippines, nor does it have a permanent establishment or fixed base in the Philippines; that on April 28, 1997, TFI and PM Nutrition Company, Inc. (PMNCI), as licensors entered into a Technology License and Technical Assistance Agreement with FAFI, a domestic corporation registered with the Board of Investment (BOI); that under the said agreement, TFI and PMNCI granted FAFI the license to use within the Philippines certain proprietary and technical information owned by TFI and PMNCI, for the production, manufacture and sale of certain animal feed products and swine products; that TFI and PMNCI will receive royalties as consideration for the grant of the license; that the parties executed on October 22, 1997, an Amendment to the Technology License and Technical Assistance Agreement to amend the Agreement to comply with the recommendations made by the Technology Transfer Registry (TTR) when the said agreement was submitted for preliminary review; and that the TTR approved and registered the Agreement and the Amendatory Agreement on December 24, 1997 under Certificate of Registration No. 2075. In reply, please be informed that under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraphs 2(b)(iii)], the tax to be imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine income tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of the 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, or right to use industrial, commercial or scientific experience. The said treaty also provides that "for as long as the transfer of technology, under Philippine laws, 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. cdtech In view of the foregoing, and inasmuch as the Technology License and Technical Assistance Agreement between TFI and PMNCI, as licensors, and FAFI, as licensee, including amendments thereto, has been approved by the Technology Transfer Registry of the Bureau of Patent, Trademarks and Technology Transfer, this Office hereby confirms your opinion that the royalties to be derived by your client, TFI, from FAFI under the aforesaid Agreement are subject to Philippine income tax at the rate of 10% and to be withheld at source. (BIR Ruling No. 036-96 dated March 6, 1996) Moreover, such royalties to be derived by your client, TFI, from FAFI under their said agreement are likewise subject to the 10% VAT pursuant to then Section 102(a)(3) of the Tax Code, as amended (now Section 108(A)(3) of the Tax Code of 1997). In this connection, Sec. 4.102-1(b) of Revenue Regulations No. 7-95 provides that 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 owner-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. 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. aisadc Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)