Request that Diversion Industries Inc. be Similarly Allowed to Avail of the Benefits of the RP-US Tax Treaty for Royalties Payable to US Franchiser, Guess?, Inc. (U.S.A.), by Applying the 10% Tax Rate

March 8, 1995 BIR RULING NO. 052-95 28 (b) (6) 000-00 052-95 Diversion Industries Inc. DII Building Km. 21, West Service Road South Super Highway, Muntinlupa Metro Manila Attention: Ms . Ellen A . Rentonel Accounting Manager Gentlemen : This refers to your letter dated December 2, 1994 stating that your company is a domestic corporation, 40% foreign owned and 60% Filipino; that it was incorporated on April 27, 1992 and started commercial operations in January 1993; that your company is the only franchise licensee here in the Philippines of Guess? Inc., (U.S.A.), an American Corporation with business address at 1444 S. Alameda, Los Angeles, CA 90021; and that since 1993 up to the present, you have been remitting 20% withholding tax on royalties based on the rate specified in BIR Form 1743W. cdti Based on the foregoing representation, you are now requesting for a ruling that your company be similarly allowed to avail of the benefits in Art. 13(2) (iii) of the RP-US Tax Treaty for the royalties payable to your US franchiser , Guess?, Inc. (U.S.A.), by applying the 10% tax rate. In reply, please be informed that your request is hereby granted. Under the most favored nation provision of the RP-US Tax Treaty, [Article 13, paragraph 2(b)(iii)], the 'tax imposable on the 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, 1995 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 from the use of, or the right to use industrial, commercial or process, or scientific equipment, or for information concerning industrial, commercial or scientific experience. The said treaty also provides that "for as long as the transfer to 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 licensing agreement between you and Guess?, Inc. (USA) has been approved by the Transfer Technology Board of the Department of Trade and Industry, royalties arising in the Philippines and payable to Guess? Inc. (USA) by your company 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 50(a) of the Tax Code, as amended (BIR Ruling No. 359-87 dated November 13, 1987). This ruling revokes BIR Ruling No. 003-93 dated January 14, 1993 in view of the Decision of the Court of Tax Appeals in the case of IBM Philippines, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4308 dated July 1, 1993). LibLex Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue