BIR Ruling [DA-416-99]

July 19, 1999 BIR RULING [DA-416-99] 28 (B) (1) & 57 (B) (A) 093-89 Quisumbing Torres 11th Floor, Pacific Star Bldg. Makati Avenue cor. Sen. Gil J. Puyat Ave. Makati City 1200 Attention: Attys. Jose R. Sandejas and Martin Ignacio D. Mijares Gentlemen : This refers to your letter dated January 25, 1999 requesting on behalf of your client, Subway International B.V. (SIBV), for confirmation that the contribution by the local franchisees to the Franchisee Advertising Fund are not subject to Philippine income tax/withholding tax. It is represented that SIBV, a Netherlands corporation, is a holder of proprietary and other rights and interest in various service marks, trademarks, trade names, and goodwill used in its business, including the trade name and service mark "SUBWAY"; that SIBV operates, and franchises others to operate sandwich shops under the trade name and service mark SUBWAY using recipes, formulas, food preparation procedures, business methods, business forms and business policies it has licensed; that under the Franchise Agreement between SIBV and its Philippine franchisees, the latter agree to pay to SIBV a royalty equivalent to eight percent (8%) based on the gross sales from each sandwich shop he operates; that in addition, the Philippine franchisees agree to contribute to a Franchisee Advertising Fund to be used to promote SUBWAY on the local level, more particularly, Paragraph 5(z) of the Agreement which provides as follows: "5. The Franchisee agrees to: "xxx xxx xxx "z. pay into the Franchisee advertising fund weekly, three and one-half percent (3.5%) of gross sales of his sandwich shop. Franchisees may increase the advertising percentage for the country temporarily or permanently by a two-thirds (2/3) vote on the basis of one vote for each operating sandwich shop. Franchisees operating in any market designated by the Franchisee advertising fund may approve a temporary or permanent additional advertising percentage to be used for local advertising by a two-thirds (2/3) vote. The Company may negotiate advertising rebates and programs with suppliers. The Company may forward the rebates to the Franchisee advertising fund or put there into an advertising fund to be spent at the Company's discretion for the benefit of franchisees. The Franchisee acknowledges that advertising contributions may not benefit franchisees in any area in proportion to the amount they paid. The Franchisee agrees that the Company may collect amounts due to the Franchisee advertising fund under the Company's own name. "The required advertising percentage reflects an increase of one percent (1%). The Franchisee will pay at the original rate of two and one half percent (2.5%) until the one percent (1%) increase is approved by the franchisees in the country. Signing this Agreement is a vote by the Franchisee for the sandwich shop licensed under this Agreement, and under Paragraph 15, for all sandwich shops owned by the Franchisee, to permanently increase the advertising percentage to three and one-half percent (3.5%) and to temporarily have a one percent (1%) additional advertising percentage in his local market until the permanent increase becomes effective. Any vote in the local market for a higher or longer term additional local advertising percentage will govern." that as provided in the Agreement, each Franchisee agrees to contribute 3.5% of its gross sales to the Advertising Fund; that a local advertising board composed of local franchisees will be set up in each country, including the Philippines; that the Local Board secures advertising for all franchisees in that country; that the Local Board secures sufficient local advertising for each franchisee in the amount corresponding to the contribution of each Franchisee to the advertising fund. Thus, the entire advertising fund is used up to pay for local advertising for the benefit of all the local franchisees; that the contributions to the Advertising Fund will be deposited in Philippine pesos in SIBV's bank account; that after the Local Board votes on and secures local advertising, the invoices from the advertising suppliers will be paid out of the SIBV account; that SIBV will be the administrator of the Advertising Fund; and that it will receive 13% of the contributions as overhead fee for administering the Advertising Fund. In reply, please be informed that under Article 12 of the RP-Netherlands Tax Treaty, the term "royalties" as used in said Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. From the foregoing definition of the term "royalties", it appears that the agreement by and between SIBV and its local franchisees requiring the contribution to the advertising fund is not or does not involve a transfer of technology, equipment, or other property where SIBV has proprietary interest in the Philippines nor does it involve transfer of scientific, technical, industrial or commercial knowledge or information to be embraced under the said definition. Moreover, to be considered royalties there must be a transfer of technology, equipment or other property where the payee has proprietary interest in this country. Specifically, there must be a transfer of scientific, technical, industrial or commercial or scientific experience. (BIR Ruling No. 093-89 dated May 2, 1989) Such being the case, and since the contribution of the local franchisees to the advertising fund will be used to purchase advertising services from suppliers to promote Subway and its products in the Philippines, this Office is of the opinion as it hereby holds that the contributions to the Advertising Fund are not considered royalties subject to Philippine income tax and consequently to withholding tax prescribed under Section 28(B)(1) in relation to Section 57(B)(A) both of the Tax Code of 1997. cDIaAS 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 & Enforcement Group)