Royalties Payable by a Domestic Corporation to a U.S. Corporation Subject to 10% Preferential Tax Rate

May 28, 1998 BIR RULING NO. 083-98 28 (b) (6)-000-00-083-98 Castillo Laman Tan Pantaleon & San Jose The Valero Tower 122 Valero Street, Salcedo Village Makati City Attention: Atty . Noel A . Laman Gentlemen : This refers to your letter dated August 26, 1996 requesting, in effect, for a ruling that royalties payable by a domestic corporation to a U.S. corporation shall be subject to the preferential tax rate of 10% under Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(b) of the RP-West Germany Tax Treaty. It is represented that Auntie Anne's, Inc. (AAI) is a non-resident foreign corporation organized and existing under the laws of Pennsylvania, USA; that it does not have a branch office or other permanent establishment in the Philippines; that on December 1, 1995, AAI has entered into a Development and Multiple Shop Franchise Agreement with Pretiolas Philippines, Inc. (PPI), a domestic corporation with principal place of business at Room 407 A & B Bonaventura Plaza, Ortigas Avenue, Greenhills, San Juan, Metro Manila; that pursuant to the said agreement, AAI shall grant PPI the franchise to own and operate "Auntie Anne's" business establishments in the Philippines, offering food products and services authorized by AAI and utilizing the Auntie Anne's system and trademarks, in consideration of a monthly franchise fee of five percent (5%) based on gross sales; and that the Development and Multiple Shop Franchise Agreement between AAI and PPI has been approved by the Bureau of Patents, Trademarks, and Technology Transfer of the Department of Trade and Industry where a Certificate of Registration was correspondingly issued with registration No. 1761 dated December 6, 1995 which is valid for five (5) years from November 1, 1995 up to October 31, 2000. In reply, please be informed that 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 limitations of the tax rate mentioned under Article 12(2)(b)of the RP-Germany Tax Treaty 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. LLjur Such being the case, and inasmuch as the Development and Multiple Shop Franchise Agreement between AAI and PPI has been approved by the Bureau of Patents, Trademarks and Technology Transfer of the Department of Trade and Industry, royalties arising in the Philippines and payable to your client, AAI, are subject to the Philippine tax at the rate of 10% pursuant to Article 13 (2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(2)(b) of the RP-West Germany Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same condition as provided in Section 50(b) of the Tax Code, as amended. (BIR Ruling No. 002-90 dated January 4, 1990) Moreover, the remittance by PPI to AAI, of 5% franchise fees arising in the Philippines as royalties based on gross sales shall be subject to 10% value-added tax pursuant to Section 102 (a)(1) of the Tax Code, as amended by Republic Act No. 7716. Section 4. 102-1 (b) of Revenue Regulations No. 7-95, implementing R.A. 7716, provides, viz.: 'Sec. 4.102-1. Value-Added Tax on the sale of services and use or lease of properties. '(a) . . . '(b) The VAT on rental and/or royalties payable to non-residential foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owned by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee.' In view thereof, PPI shall, before making payment of royalties to AAI, withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of the said non-resident foreign corporation. (Section 4.110-3(b) of Revenue Regulations No. 7-95). The duly validated VAT declaration/return is sufficient evidence for Pretiolas Philippines, Inc. in claiming input tax credit. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. dctai Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue