Royalty Payments Taxable at 25%

January 14, 1993 BIR RULING NO. 003-93 ROYALTY PAYMENTS TAXABLE AT 25% 24 000-00 003-93 Villamor Legarda & Associates Suites 402-403 4th Floor, Heart Tower, Valero St., Salcedo Village, Makati, Metro Manila Attention: Atty . Eliseo V . Villamor This refers to your letter dated October 30, 1992, requesting (1) that your client, 3M Philippines, Inc. be made to pay the higher tax of 25% on its royalty payments to Minnesota Mining and Manufacturing Company (U.S.A.) effective July 1, 1992 (and not beginning January 21, 1992) when Revenue Memorandum Circular (RMC) No. 39-92 was issued which revoked previously issued BIR Rulings, e.g., BIR Ruling No. 359-87, allowing the application of the "most favored nation" tax rate on payments of royalties to recipients/residents in the United States in view of the memorandum decision, of the Commissioner dated January 21, 1992 denying the claim of the IBM World Trade Corporation and International Business Machines Corporation for refund of alleged overpaid taxes on royalty income derived from the Philippines; and (2) that pending your client's receipt of a clarificatory ruling from this Office, it be allowed to pay/remit the usual 10% tax on its royalty payments. It appears that this Office in BIR Ruling No. 359-87 dated November 13, 1987 ruled that "inasmuch as the patent and trademark license and technical information agreement between 3M Philippines, Inc. and Minnesota Mining and Manufacturing Company (U.S.A) has been approved by the Transfer Technology Board and Ministry (Department) of Trade and Industry, royalties arising in the Philippines and payable to Minnesota Mining and Manufacturing Company (U.S.A.) by 3M Philippines, Inc. are subject to the Philippine tax at the rate of 10% because this rate appears in the RP-West Germany Tax Treaty and pursuant to Article 13, paragraph 2 (b) (iii) of the RP-US Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same conditions so provided in Section 52 of the Tax Code, as amended." In reply, please be informed that as stated in paragraph (1) of RMC No. 39-92, the revocation of the BIR Rulings, lie BIR Ruling No. 359-87 which was issued to your client, 3M Philippines, Inc. allowing the availment of the benefits of the "most favored nation" clause on payments of royalties to recipients in the United States cannot be given retroactive effect in the light of Section 246 of the Tax Code which provides "Sec. 246. Non-retroactivity of Rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: (a) where the taxpayer deliberately mistakes or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith." The prejudice that would result to your client by a retroactive application of RMC No. 39-92 is beyond question for it would be required to pay a deficiency income tax equivalent to the difference between the 25% and 10% tax rates on its royalty payments effective January 21, 1992 whereas before the issuance of RMC No. 39-92 it correctly withheld and paid the 10% tax on its royalty payments to Minnesota Mining and Manufacturing Company (U.S.A) relying in good faith on BIR Ruling No. 359-87 which allows the application of the "most favored nation" tax rate of 10% on royalties paid to the latter. Such being the case, the royalty payments of your client shall be subject to the 25% tax rate as of July 1, 1992 when RMC No. 39-92 was issued revoking BIR Rulings like BIR Ruling No. 359-87 issued to your client. (ABS-CBN Broadcasting Corp. vs. CTA 108 SCRA 151-152; Commissioner of Internal Revenue vs. Burroughs Limited and the Court of Tax Appeals, G.R. No. 66653, June 23, 1986). Please request your client to pay at the 25% rate on all withholdings subsequent to July 1, 1992. JOSE U. ONG Commissioner of Internal Revenue