BIR Ruling [DA-533-98]

November 26, 1998 BIR RULING [DA-533-98] Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Mr . George J . Lavadia Principal Tax and Corporate Services Department Gentlemen : This refers to your letter dated September 2, 1997 stating that Armedic Philippines, Inc . is a domestic corporation duly organized and registered under the laws of the Philippines, with principal office address at #2 Orion corner Mercedes Streets, Bel-Air Village, Makati City; that on November 18, 1992 Armedic entered into a Franchise Agreement with Servier International B . V ., a corporation duly organized and existing under the laws of Netherlands, whereby the latter granted to Armedic the exclusive license to use the latter's know-how, franchise system and brand-image in the promotion and distribution of medical and pharmaceutical products; that the said Agreement is valid for a period of five (5) years from November 18, 1992 up to November 18, 1997; that on April 30, 1997, an Addendum was executed by the parties extending the duration of the Agreement until December 31, 2003; that the Franchise Agreement and its Addendum was registered with the Technology Transfer Registry, Bureau of Patents, Trademarks and Technology Transfer on August 1, 1997 under Certificate of Registration No. 2002; that Armedic shall be entitled to licensing, technical information, technical training and technical assistance, service logo and materials and other rights; and that in consideration for said right, Servier is entitled to receive a royalty equivalent to 1% of Armedics net sales payable quarterly and a fixed initial royalty of one hundred thousand (100,000) guilders. LLcd Based on the foregoing representations, you now request for a confirmation of your opinion that the royalties paid to Servier are subject to Philippine income tax at the rate of 15% pursuant to Article 12(2)(b) of the RP-Netherlands Tax Treaty. In reply, please be informed that Article 12(2)(b) of RP-Netherlands Tax Treaty , provides: "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 that State in which they arise and according to the laws of the State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and (b) 15 per cent of the gross amount of the royalties in all other cases. 3 . . . 4. The term "royalties" as used in this Article means payments of any kind received as consideration for the use of, or the right to use, any copyright, 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." Such being the case, and inasmuch as the Technical Service Agreement between Servier International, B.V. and Armedic Philippines, Inc. has been approved and registered with the Technology Transfer Registry of the Bureau of Patents, Trademark and Technology Transfer, your opinion that royalties arising in the Philippines and payable to Servier by Armedic are subject to the preferential tax at the rate of 15% is hereby confirmed. (BIR Ruling No. DA-189-97 dated April 18, 1997) cdll Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)