Philippine Withholding Tax at the Rate of 10% Imposed on Royalties

March 20, 1989 BIR RULING NO. 039-89 248 305-88 039-89 Gentlemen : This refers to your letter dated January 9, 1989 requesting confirmation of your opinion to the effect that royalties payable by Asian Appraisal Inc. (Asian Appraisal) a domestic corporation to American Appraisal, Inc. (American Appraisal), a U.S. corporation under a Technical Assistance Contract executed between the parties, are subject to Philippine withholding tax at the rate of 10% pursuant to Sec. 2(b)(iii), Art. 13 of the RP-US Tax Treaty, in relation to Sec. 2(b) Art. 12 of the RP-West Germany Tax Treaty. It is represented that Asian Appraisal is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that it is engaged in the business of valuation and appraisal of industrial and commercial properties; that American Appraisal is a corporation duly organized and existing under the laws of the State of Delaware, U.S.A.;that it is a non-resident foreign corporation not engaged in trade or business in the Philippines; that on November 17, 1985 Asian Appraisal and American Appraisal entered into a Technical Assistance Contract wherein the latter agreed to provide the former technical advice, professional assistance, information and facilities for its operations including the following: a) Accounting and financial systems related to valuation and appraisal services; b) Accounting, engineering and economic data and data concerning market survey and reports pertinent to the business of the company; c) Advice on management and business operations and analysis and recommendations for procedures pertaining thereto; d) Training of personal and providing facilities for such training; e) Brochures and other advertising materials. that the contract was to remain in force and effect for three (3) years from January 1, 1985 to December 31, 1987; that on November 4, 1987 the parties agreed to extend the contract for an additional period of 3 years from January 1, 1988 up to December 31, 1990; that in consideration of the services rendered by American Appraisal to Asian Appraisal, Asian Appraisal shall pay American Appraisal royalties equal to 2% of gross billings for the year, net of intercompany billings, starting 1986; and that the Technical Assistance Contract as well as the extension of such Technical Assistance Contract for another one year effective January 1, 1988 has been approved by the Central Bank of the Philippines on February 10, 1987 and April 22, 1988. In reply thereto, I have the honor to inform you that your opinion is hereby confirmed. Under Article 13, paragraph (3) of the RP-US Tax Treaty, the term "royalties" means payments of any kind received as consideration, among others, for information concerning industrial, commercial or scientific experience. The "technical assistance fee" paid by Asian Appraisal Inc. are considered royalties since they are payments for the said kind of information. Under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph 2(b)(iii)], the tax imposable on royalties derived by a resident of the United States from sources within the Philippines shall be 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 Germany 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, trademark, 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 .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 (b) 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 Contract between Asian Appraisal, Inc. and American Appraisal, Inc. has been approved by the Central Bank of the Philippines, royalties (service fee) arising in the Philippines and payable to American Appraisal, Inc. by Asian Appraisal, 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 as provided in Section 51 of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner