Exemption from Expanded Withholding Tax - Phelps Dodge International Corporation

March 22, 1990 BIR RULING NO. 031-90 36 (a) 263-86 031-90 Gentlemen : This refers to your letter dated May 24, 1988 requesting from this Office a ruling on the percentage of withholding tax which Phelps Dodge Philippines, Inc. (hereinafter called "PDP") should deduct from the technical assistance fee payable to Phelps Dodge International Corporation (hereinafter called "PDIC"). Documentary evidence submitted shows that PDP, a duly registered wholly-owned domestic corporation engaged in the fabrication of copper rods, entered into a technical assistance agreement with PDIC, a non-resident foreign corporation based in Delaware, U.S.A., whereby PDIC is willing to render to PDP technical assistance and direction as well as engineering assistance and expertise in order that PDP can achieve its basic goal of manufacturing electric wire and cable and related products in the most productive and efficient manner and in accordance with the highest level of international safety and quality standards; that the technical assistance agreement dated May 29, 1986, is duly registered with the Technology Transfer Board of the Department of Trade and Industry and is valid for five (5) years from June 20, 1986 to June 19, 1991; and that for the use of the services and assistance being rendered by PDIC to PDP under this Agreement, PDIC shall be paid a fee computed at the rate of three percent (3%) of PDP's net sales. cdtech In reply, please be informed that under the foregoing facts, Phelps Dodge International Corporation is classified as a foreign corporation not engaged in trade or business in the Philippines pursuant to Section 25(b) of the Tax Code, as amended. As such, the technical assistance fee paid to it is not subject to the expanded withholding tax as prescribed under Revenue Regulations No. 6-85, otherwise known as the Revised and Consolidated Expanded Withholding Tax Regulations. However, the technical assistance fee received by Phelps Dodge International Corporation is in the nature of royalties subject to tax of 10% under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph 2(b) (ii)] being 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. Article 12, paragraph 2(b) of the RP-West German Tax Treaty, effective January 1, 1985, provides that royalties arising in the Philippines and paid to a resident of West Germany may also be taxed in the Philippines but the tax so charged shall not exceed 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, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific experience. The said treaty also provides that "for as long as the transfer of technology under Philippine law, is subject to approval, the limitation of the tax rate mentioned under Article 12 paragraph 2(b) of the RP-West German Tax Treaty, shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties have been approved by the Philippine competent authorities." Such being the case, and inasmuch as the technical assistance agreement between PDP and PDIC has been approved by the Transfer Technology Board of the Department of Trade and Industry, royalties arising in the Philippines and payable to PDIC by PDP 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 as provided in Section 51 of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner