BIR Ruling [DA-447-98]

October 5, 1998 BIR RULING [DA-447-98] Philippine Computer Associates Int'l. Inc. 20/F Antel Corporate Center 139 Valero Street Salcedo Village, Makati City Attention: Ms . Remedios Toribio-Fajardo Financial Controller Gentlemen : This refers to your letter dated May 25, 1998 requesting for a ruling on the appropriate withholding tax rate on royalty payments made by it to its parent company, CA Management, Inc. based in Delaware, U.S.A.. LLpr It is represented that Philippine Computer Associates Int'l., Inc. (PCAII) is a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office at 20/F Antel Corporate Center, 139 Valero St., Salcedo Village, Makati City; that it has an existing Distributor Agreement with CA Management, Inc., a corporation organized under the laws of Delaware, U.S.A..; that the said agreement was duly approved by the Bureau of Patents, Trademarks and Technology Transfer (BPTTT) as evidenced by Certificate of Registration No. 1606; that as a consideration thereof, PCAII is required to pay royalties to CA Management, Inc. based on amounts invoiced from its customers; and that at present PCAII is withholding twenty five percent (25%) tax on such royalty payments pursuant to RMC No. 39-92. In reply, please be informed that under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph 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 tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a Third State. Article 12, paragraph 2(b) of the RP-West Germany Tax Treaty, which took effect on 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 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. The said 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 the Philippine competent authorities. Such being the case, and inasmuch as the Distributor Agreement with CA Management Inc. has been approved by the Bureau of Patents, Trademarks and Technology Transfer of the Department of Trade and Industry, royalties arising in the Philippines and payable to CA Management Inc. are subject to Philippine tax rate of 10% pursuant to Article 13(2)(b)(iii) of the RP-US Tax Treaty, in relation to Article 12(b) of the RP-Germany Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same condition as provided in Section 50(b) of the Tax Code, as amended (now Section 57(B) of the Tax Code of 1997). [BIR Ruling No. 002-90 dated January 4, 1990] Moreover, the remittance by PCAII to CA Management Inc. of the said royalties shall be subject to the 10% value-added tax pursuant to Section 102(a)(1) of the Tax Code, as amended (now Section 108 (A)(1) of the Tax Code of 1997). Furthermore, the VAT on rental and/or royalties payable to non-resident 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 by the licensor and licensee. The licensee shall be responsible for the payment of VAT on such rental and/or royalties in behalf of the non-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. (Sec. 4.102-1(b), Rev. Regs. No. 7-95) In view thereof, PCAII shall, before making payment of royalties to CA Management Inc., withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of latter. (Sec. 4.110-3(b), Rev. Regs. No. 7-95) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. casia Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)