25% Withholding Tax — Royalties

May 8, 1980 BIR RULING NO. 046-80 The Shell Chemical Co. (Philippines) Inc. 1330 Roxas Blvd., Metro Manila Attention: Mr . V . K . Esteban Treasury Manager Gentlemen : This refers to your letter dated February 20, 1979 requesting information as to whether the ruling issued by this Office on April 27, 1973 to the effect that the assistance and service fees paid by Shell Chemical Co. (Philippines) Inc. (hereinafter referred to as Shell Chemical) to Shell International Chemical Co., Ltd. (hereinafter referred to as International Chemical) for services rendered outside the Philippines in favor of the former are not subject to the withholding tax is still applicable or has already been modified, in view of the present provisions of the National Internal Revenue Code and the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of the Philippines for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains dated June 10, 1976. cdt Section 37(a)(4)(C) of the Tax Code of 1977, as amended by P.D. No. 1457 provides that royalties for "the supply of scientific, technical, industrial or commercial knowledge or information" are treated as gross income from sources within the Philippines; hence, are subject to Philippine income tax. On the other hand, the pertinent provisions of Article 11 of the RP-UK Tax Treaty provides: "(2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: (a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films and films or tapes for television or radio broadcasting; (b) in all other cases, 25 per cent of the gross amount of the royalties. "(3) The term "royalties" as used in this Article means payment 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 cinematograph films, and films or tapes for radio or television 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 ." (Emphasis ours) In reply, I have the honor to inform you that under the service agreement between Shell Chemical and International Chemical, the latter shall give technical advice and commercial information regarding the former's business and the chemical industry. Under the above provision of the National Internal Revenue Code, the fees paid for such information are now considered as royalties; hence shall be treated as income from sources within the Philippines. Moreover, under the above provisions of the RP-UK Tax Treaty, such fees are also considered as royalties. Such being the case, said fees are now subject to income tax and consequently, to the withholding tax. In view thereof, the foregoing ruling of April 27, 1973 is no longer applicable and said fees being paid by Shell Chemical to International Chemical are now subject to 25% withholding tax, pursuant to Article 11 of the RP-UK Tax Treaty. Very truly yours, RUBEN B. ANCHETA Acting Commissioner