Withholding Tax of 10% on Royalties

March 4, 1988 BIR RULING NO. 075-88 36 000-00 075-88 Gentlemen : This refers to your letter dated January 8, 1988 requesting confirmation of your opinion to the effect that the royalties to be paid by your client, Merck, Inc. to E. Merck Beteiligungen OHG, are subject to a withholding tax of 10% pursuant to Article 12(b) of the RP-West Germany Tax Treaty. It is represented that Merck, Inc. is a domestic corporation engaged in the manufacture and sale of pharmaceutical products; that E. Merck Beteiligungen OHG is a corporation organized and existing under the laws of the Federal Republic of Germany; that Merck, Inc. entered into a License Agreement and Renewal Agreement with E. Merck Beteiligungen OHG for the use of its inventions, know-how, patents, trademarks and other intellectual property rights relating to the manufacture of ready for sale pharmaceutical specialties using therapeutically active ingredients; that Merck, Inc. shall pay E. Merck Beteiligungen OHG a royalty of 5% of net sales; and that the License Agreement as well as the Renewal Agreement and the Supplemental Agreement had been registered with and approved by the Technology Transfer Board as evidenced by Certificate of Registration Nos. 0085 and 0594 dated January 10, 1980 and September 18, 1985 respectively. In reply thereto, please be informed that your opinion is hereby confirmed. Article 12(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 limitations 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 has been approved by the Philippine competent authorities. cdtech Such being the case, and inasmuch as the License Agreement as well as the Renewal Agreement and the Supplemental Agreement entered into by Merck, Inc. and E. Merck Beteiligungen OHG had been approved by the Technology Transfer Board, the royalties arising in the Philippines payable to E. Merck Beteiligungen OHG by Merck Inc. are subject to Philippine tax at the rate of 10%. The said tax shall be withheld and paid in the same manner and subject to the same conditions as provided in Section 50 of the Tax Code. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner