BIR Ruling [DA-423-99]

July 22, 1999 BIR RULING [DA-423-99] RP-Netherlands Tax Treaty 077-96 Quisumbing Torres 11/F, Pacific Star Building Makati Ave. cor. Sen. Gil J. Puyat Ave. Makati City 1200 Attention: Atty. Jose R. Sandejas Gentlemen : This refers to your letter dated February 16, 1999 requesting on behalf of your client, Subway International B.V. (SIBV), for tax treaty relief on the royalty payment it will receive from the Franchisees pursuant to the Franchise Agreement it entered into with the Franchisees under Article 12 of the RP-Netherlands Tax Treaty. It is represented that SIBV is a non-resident foreign corporation organized and existing under the laws of the Netherlands; that it is the holder of proprietary and other rights and interests 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 Paragraph 3 of the Franchise Agreement, SIBV grants the franchisee; 1. continued access to SIBV's licensed recipes, formulas, food preparation procedures, business methods, business forms, business policies and body of knowledge pertaining to the operation of a sandwich shop, including the loan of a copy of SIBV's Operations Manual, during the term of this Agreement; HCEISc 2. continued access to information pertaining to new developments, improvements, techniques and processes in SIBV's sandwich business, during the term of the Agreement; and 3. a limited, non-exclusive license during the term of the Agreement to use SIBV's licensed rights in and to its service marks and trademarks in connection with the operation of one sandwich shop to be located at a site approved by SIBV and the franchisee. and that in consideration of the rights and privileges granted to the franchisee under the Agreement, the local franchisees shall pay to SIBV a royalty equivalent to eight percent (8%) of the gross sales from each sandwich shop he operates throughout the term of the Agreement. In reply, please be informed that pertinent portion of Article 12 of the RP-Netherlands Tax Treaty provides, viz : "Article 12 "ROYALTIES "1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 percent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas in that State; b) 15 percent of the gross amount of the royalties in all other cases. "3. The term "royalties" as used in this 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 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." Such being the case, and since SIBV the recipient of the royalties to be paid by the local franchisees under the Franchise Agreement is also the beneficial owner thereof, such royalties are therefore subject to Philippine income tax and consequently to the withholding tax rate of fifteen percent (15%) pursuant to Article 12(2)(b) of the RP-Netherlands Tax Treaty. (BIR Ruling No. 077-96 dated July 12, 1996) cAHIaE Moreover, under Section 108(A)(1) and (3), there shall be levied assessed and collected a value added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services which shall likewise includes: the lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret or formula or process, goodwill, trademark, trade, brand, or other like property or right, and the apply of scientific, technical, industrial, commercial knowledge or information. Considering that your client, SIBV, entered into a Franchise Agreement with its Franchisee to operate sandwich shops under the brand name and service mark "Subway" using recipes, formulas, food preparation procedures, business methods, business forms and business policies it has licensed, the royalties it will receive as a consequence, is therefore, subject to the 10% value-added tax under Section 108(A)(1) and (3) of the Tax Code of 1997. 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)