Payments to be Made by Smart Communications to Fujitsu Asia Not in the Nature of Royalty Payments

February 24, 1999 BIR RULING NO. 020-99 RP-Sing. Tax Treaty-024-97-020-99 First Philippine Consultants, Inc. Penthouse 2nd Deck, Salamin Building 197 Salcedo St., Legaspi Village 1229 Makati City Attention: Ms . Ophelia G . Jimenez Tax Manager Gentlemen : This refers to your letter dated December 14, 1998 requesting for a ruling as to whether or not the payments to be made by Smart Communications, Inc. (SMART) to Fujitsu Asia Pte Ltd. are in the nature of royalty payments. LibLex Documents submitted disclosed that SMART is a domestic corporation engaged in the telecommunications business; that WE SERVE Systems, Inc. (WE SERV) is a foreign corporation organized and existing under the Laws of the State of Delaware, U.S.A.; that a contract (Smart Integrated Business System) was entered into by and between SMART and WE SERV for the supply and delivery by the latter to the former of Hardware and Software comprised within the Smart Integrated Business System; that by virtue of the contract, SMART is granted by WE SERV an irrevocable royalty-free license to use, copy, modify or enhance WE SERV's interface information software for the purpose of operating any of the hardware and software products in the Philippines and for the use of said software in providing services to SMART's customers; that on May, 1998, WE SERV assigned all of its rights, title and interests in the aforementioned contract to Fujitsu Asia Pte Ltd., a company incorporated under the Laws of Singapore with offices at 20 Science Park Road, No. 03 Tele Tech Par, Singapore Park 11, Singapore. You now pose the query on whether it is proper for SMART to treat as royalty its payments to WE SERV (through FUJITSU ASIA PTE. LTD. as assignee) for the products supplied under the contract. In reply, please be informed that Article 12(3) of the RP-Singapore Tax Treaty defines "Royalties" viz: "ARTICLE 12 Royalties "1. . . . "2. . . . "3. The term "royalties" 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 television or 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." thus, the payments to be made by SMART to Fujitsu Asia Pte Ltd. as the assignee of WE SERV for the supply and delivery of Hardware and Software comprised within the Smart Integrated Business System are not in the nature "royalties" within the purview of Art. 12(3) of the RP-Singapore Tax Treaty. Since the software portion under the agreement is granted license-free, it is as if the software is made a customary part of the hardware delivered under the contract. In the case of software to be developed/delivered, no royalties are required if it appears from the agreement that the same becomes the sole property of the Philippine corporation. (BIR Ruling 024-97 dated March 18, 1997) Moreover, Article 7 of the RP-Singapore Tax Treaty provides, viz: "ARTICLE 7 Business Profits "1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to the permanent establishment." xxx xxx xxx" thus, if Fujitsu Asia Pte Ltd. has a permanent establishment in this country as the term is defined in Article 5 of the aforesaid tax treaty, the profits of Fujitsu Asia Pte Ltd. may be taxed in this country but only so much of it as is attributable to the permanent establishment. However, it shall be understood that the delivery of the hardware and software comprised under the Smart Integrated Business System is subject to 10% VAT. This ruling is being issued based on 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. cdlex Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group