Philippine Tax at the Rate of 10% Imposed on Royalties

March 8, 1988 BIR RULING NO. 088-88 36 (a) 359-87 088-88 Gentlemen : This refers to your letter dated January 19, 1988 requesting confirmation of your opinion to the effect that the royalties payable by your client, Wrigley Philippines, Inc. (WPI) to Wm. Wrigley Jr. Company (WWJC) a non-resident foreign corporation pursuant to a Technical Assistance Agreement entered into by said companies are subject to a 10% withholding tax pursuant to Art. 13, par. 2(b)(iii) of the RP-US Tax Treaty in relation to Art. 12, par. 2(b) of the RP-West Germany Tax Treaty. It is represented that under the Technical Assistance Agreement entered into as of January 1, 1987, WWJC will grant to WPI technical assistance and information relating to technique known to and as may be developed by WWJC in the field of marketing, selling, advertising, manufacturing and packaging of chewing gum, in consideration of the payment by WPI to WWJC of a fee equivalent to one half per cent (0.5%) based on net domestic sales, plus one per cent (1.0%) based on net export sales, of all chewing gum manufactured and sold by WPI; that under the Technical Data Agreement entered into as of January 1, 1987 WWJC will grant to WPI the license to manufacture and sell chewing gum within the Philippines using secret technical data acquired and developed by WWJC consisting principally of formulae, written description, blue-prints, manufacturing processes, inventions and methods with respect to the manufacture of chewing gum, in consideration of the payment by WPI to WWJC of a fee of one half per cent (0.5%) based on net domestic sales, plus one per cent (1.0%) based on net export sales; and that both agreements together with a Trademark Agreement were registered with and approved by the Technology Transfer Board (now Bureau of Patents, Trademarks and Technology Transfer) as evidenced by Certificates of Registration Nos. 0783, 0784 and 0785 all dated December 29, 1987. In reply, I have the honor to inform you that your opinion is hereby confirmed. 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 (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. Such being the case, and inasmuch as the Technical Assistance Agreement and the Technical Data Agreement as well as the Trademark Agreement between WPI and WWJC had been approved by the Technology Transfer Board (now Bureau of Patents, Trademarks and Technology Transfer), royalties arising in the Philippines and payable to WWJC by WPI 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. cdt Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner