Taxability of License Fees and Royalties Paid to a Non-resident U.S. Corporation Under the RP-US Tax Treaty

May 3, 1991 BIR RULING NO. 079-91 25 (b) (1) 456-88 079-91 Gentlemen : This refers to your letter dated April 3, 1990 requesting in effect a ruling confirming your opinion that the license fees and royalties you are paying to Systematics, Inc. (SI), a non-resident U.S. corporation pursuant to your Agreement are subject to the 10% withholding tax under the RP-US Tax Treaty. It is represented that you entered into a "Software License Agreement" with SI, a non-resident foreign corporation based in Arkansas, U.S.A., whereby you were granted by SI the right to use certain computer system programs and to avail of the technical knowledge and know-how relative to the use of such programs, including all updates, enhancements, improvements or replacements thereto; that SI agreed to deliver to you a complete set of its standard operational instructions and documentation for said software programs and to receive copies of any revisions, improvements, enhancements, modifications and updates to such instructions/documentation; that SI agreed to make available to you its standard software training courses in accordance with SI's Education and Training Department Schedule; that in consideration for the licenses and rights granted under the agreement, you agreed to pay SI a licenses fee payable upon execution of the agreement and a royalty fee equal to 5% of the net amount you received from your customers; that the "Software License Agreement" was duly registered with the Technology Transfer Board of the Department of Trade & Industry on July 27, 1989 under Certificate of Registration No. 950; that the agreement is valid for a period of 5 years commencing on April 30, 1989 and thereafter shall continue in full force and effect until terminated or modified in accordance with its terms; and that you are of the opinion that the license fees and royalties you are paying to SI are subject to a 10% withholding tax pursuant to Article 13, paragraph 2(b) (iii) of the RP-US Tax Treaty in relation to Article 12, paragraph 2 (b) of the RP-West Germany Tax Treaty. In reply, please be informed that your opinion to the effect that the license fees and royalties you are paying to Systematics, Inc., a non-resident U.S. Corporation, pursuant to your "Software License Agreement" with said corporation are subject to a 10% withholding tax under Article 13, paragraph 2 (b) (iii) of the RP-US Tax Treaty in relation to Article 12, paragraph 2 (b) of the RP-West Germany Tax Treaty is hereby confirmed. Under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph 2 (b) (iii)], the tax impossible on royalties (which likewise embrace license fees) 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 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 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. Such being the case, and inasmuch as the "Software License Agreement" between you and Systematics Inc. had been duly registered and approved by the Technology Transfer Board of the Department of Trade & Industry on July 27, 1989 under Certificate of Registration No. 950, royalties and license fees arising in the Philippines and payable to Systematics Inc., a non-resident foreign corporation based in Arkansas, U.S.A., are subject to the Philippine Tax at the rate of 10% because this rate appears in the RP-West Germany Tax Treaty, 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 50 of the Tax Code. This ruling is being issued based on facts represented. If upon investigation, it is disclosed that the facts are different, this ruling shall be considered as null and void. Very truly yours, (SGD.) JOSE U. ONG Commissioner