BIR Ruling [DA-532-98]

November 27, 1998 BIR RULING [DA-532-98] AR Packaging Corporation Felix Manalo Street Punta, Sta. Ana M a n i l a Attention: Mr . Feliciano M . Ingalla VP & Chief Finance Officer Gentlemen : This refers to your letter dated July 17, 1997 requesting for a confirmation of your opinion that the royalties paid to VAW EUROPACK GMbH (VAW) by AR Packaging Corporation (ARPC) are subject to the 10% final withholding tax pursuant to the RP-Germany Tax Treaty. LexLib It is represented that VAW is a non-resident foreign corporation organized and existing under the laws of Germany with principal office at Friedrich-Meyer Stra b e 23, 79331 Teningen, Germany; that ARPC is a domestic corporation engaged in the business of manufacturing flexible packaging materials; that an agreement was entered into by and between ARPC and VAW for the transfer of technical know-how and innovative developments; that said agreement is registered with the Technology Transfer Registry of the Bureau of Patents, Trademarks and Technology Transfer as evidenced by Certificate of Registration Nos. 1900 and 1845; that under said agreement, VAW will provide ARPC with technical services in the areas of training and education, machine condition audit/preventive maintenance, operational efficiency/profitability audits, trouble shooting/problem solving, quality system, product/process testing and assessment of environmental investment among others, that are presently available or will be available at a future date. In reply, please be informed that Article 12 of the RP-Federal Republic of Germany Tax Treaty provides, viz: "ARTICLE 12 ROYALTIES "(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: "a) 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 cinematograph films or tapes for television or broadcasting, or "b) 10% of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, 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. "For as long as the transfer of technology, under Philippine law, 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. "(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 cinematograph films or tapes for television or broadcasting, any 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, or for information concerning industrial, commercial or scientific experience. Such being the case, and inasmuch as the Technical Service Agreement between ARPC and VAW has been approved and registered with the Technology Transfer Registry of the Bureau of Patents, Trademarks and Technology Transfer, your opinion that royalties arising in the Philippines and payable to VAW by ARPC are subject to the preferential tax at the rate of 10% is hereby confirmed. (BIR Ruling No. DA-189-97 dated April 18, 1997) Moreover, the remittance by ARPC to VAW of the said royalties shall be subject to the 10% value-added tax (VAT) pursuant to then Section 102 (a)(3) of the Tax Code, as amended by Republic Act No. 7716 [now Section 108 (A)(3) of the Tax Code of 1997]. Furthermore, 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 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. (Section 4.102-1 (b), Revenue Regulations No. 7-95) 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. LLphil Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)