10% Final Withholding Tax - Royalties Paid to Rohm and Haas Company, U.S.A

January 4, 1990 BIR RULING NO. 002-90 25 (b) 087-88 002-90 Gentlemen : This refers to your letter dated August 11, 1989 requesting confirmation of your opinion that royalties paid to Rohm and Haas Company, U.S.A. are subject to 10% final withholding tax pursuant to the most favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. cdt It is represented that your company is a domestic corporation duly registered under Philippine laws with authority to engage in the manufacture of chemicals; that on December 9, 1975, your company entered into a License Agreement (the Agreement) with Rohm and Haas Company (the Licensor) a corporation organized and existing under the laws of the State of Delaware, U.S.A.; that said agreement was renewed on March 23, 1982; that in the said agreement, your company was granted by the Licensor the right to use the latter's patent and trademark rights; that the Licensor likewise undertook to provide your company with the technical information possessed by it relating to the manufacture, use and properties of its licensed products; that in consideration for the right granted by the Licensor to your company under the Agreement, your company bound itself to pay royalties at the rate of 2% of the net sales, plus 2% of the net foreign exchange earnings; that the Agreement provides that the same shall be valid and effective upon its approval by the Technology Transfer Board; that on January 11, 1982, the Agreement was registered with the Technology Transfer Board under Certification of Registration No. 0383; that on March 22, 1988, your company entered into another contract with the Licensor; that in the said contract, the Licensor undertook to furnish your company the following: a) Technical and Information Services; b) Grant of Patent Licenses and Trademark Rights; c) Project Engineering Services; d) Consultant Services; e) Personnel Advisory Services; f) Financial Services; and g) Laboratory Support Activities Services; that in consideration for the right granted by the Licensor to your company under the Contract, your company bound itself to pay royalty of four (4%) percent of net sales plus four (4%) percent of net foreign exchange earnings to the former in the U.S. dollars or in local currency within 30 days following the date of the bill; that the contract provides that it shall be valid and effective when approved by the appropriate authorities in the Philippines and will continue in effect until December 31, 1997; that on May 3, 1989, an amendment to the said licensing agreement was entered into between your company and the Licensor wherein, among others, the royalty rate was reduced from 4% to 2% and the term of the agreement was shortened from December 31, 1997 to June 29, 1992 deleting the provision on automatic renewal; that on June 7, 1989, said renewal and amendment of the License Agreement were registered with the Technology Transfer Board under Certificate of Registration No. 929; that for the effective implementation of the said License Agreement, your company entered into a Management Service Contract with the Licensor on May 4, 1988 effective until December 31, 1990; that in said management contract, Rohm and Haas, U.S.A. undertook to furnish your company the following: a) information services concerning design and implementation of new computer system; b) technical engineering services, design and construction supervision; and c) consultant services for industrial chemicals, plastics, agriculture, polymers, resins and monomers and other personnel and financial services; and that in consideration of the said services, your company shall reimburse the Licensor a percentage of actual cost. In reply, please be informed that your opinion that the royalties being paid by your company to Rohm and Haas Company, U.S.A. are subject to 10% final withholding tax pursuant to the most favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty is hereby confirmed. Article 13 of the RP-US Tax Treaty provides, viz: "ARTICLE 13 ROYALTIES "(1) Royalties derived by a resident of one of the Contracting State from sources within the other Contracting State may be taxed by both Contracting States. "(2) However, the tax imposed by that other Contracting State shall not exceed "(a) In the case of the United States, 15 percent of the gross amount of the royalties, and "(b) In the case of the Philippines the least of: "(i) 25 percent of the gross amount of the royalties, "(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and "(iii) 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. "(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 used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. "(4) . . . "(5) . . . ." On the other hand, Article 12 of the RP-West 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 per cent 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 cinematographic films or tapes for television or broadcasting, or "(b) 10 per cent 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" 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 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. "(4) . . . "(5) . . . "(6) . . . ." Such being the case, inasmuch as the license agreement between your company and Rohm and Haas Company, U.S.A. has been approved by the Transfer Technology Board of the Ministry (now Department) of Trade and Industry, royalties arising in the Philippines and payable to Rohm and Haas Company, U.S.A. by your company are subject to the Philippine tax at the rate of 10% because this rate appears in the RP-West Germany Tax Treaty pursuant to Article 13, paragraph 2(b) (iii) of the RP-US Tax Treaty. Moreover, the service fees you are paying to Rohm and Haas, U.S.A. for the services it undertook to furnish you under your Management Service Contract on May 4, 1988 with said company is not subject to Philippine income tax since it appears from your letter dated November 21, 1989 that since the inception of the said management agreement, no expatriates nor consultants have been assigned to you for more than 183 days. 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, thus this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE U. ONG Commissioner