Philippine Tax at the Rate of 10% Imposed on Royalties

March 8, 1988 BIR RULING NO. 087-88 37-a 263-88 087-88 Gentlemen : This refers to your letter dated September 22, 1987 requesting that you be allowed to avail of the benefit provided for in Article 13, paragraph 2(b)(iii) of the RP-US Tax Treaty, regarding the lowest rate of Philippine tax that may be imposed on the royalties payable by you to Gillette Co. (U.S.A.), by applying the rate of 10% on royalties as provided for in the RP-West Germany Tax Treaty. It is represented that Gillette (Philippines), Inc. a duly registered domestic corporation entered into as agreement with Gillette Co. (U.S.A.), a corporation duly organized and existing under the law of the State of Delaware, U.S.A. whereby the former grants to the latter an exclusive license to manufacture and package its products strictly in accordance with the agreement and to sell the same under its trademarks in the Philippines; that the license agreement dated December 1, 1985 concerning the manufacture, packaging and distributing of razors, razor blades, toiletries and writing instrument and refills is duly registered with the Technology Transfer Board of the Ministry of Trade and Industry and under Certificate of Registration No. 0699 is valid for five (5) years from December 1, 1985 to November 30, 1990; and that for and in consideration of the license granted, Gillette (Philippines), Inc. undertakes to pay Gillette Co., U.S.A. 1% of net sales for blades and razors, 2% of net sales for toiletries and 2% of net sales for writing instruments and refills. cdtech In reply, I have the honor to inform you 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 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 the 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 charge 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 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 contracts giving rise to such royalties have been approved by the Philippine competent authorities. Such being the case, and inasmuch as the license agreement between Gillette (Philippines), Inc. and Gillette Co., (U.S.A.) has been approved by the Transfer Technology Board of the Ministry of Trade and Industry, royalties arising in the Philippines and payable to Gillette Co., (U.S.A.) by Gillette (Philippines), Inc. 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 as provided in Section 50 of the Tax Code, as amended. cd Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner