Withholding Tax of 10% on Royalty Payments

June 8, 1990 BIR RULING NO. 115-90 36-a 444-88 115-90 Gentlemen : This refers to your letter dated March 20, 1990 requesting a ruling allowing your client, Nalco Chemical Company (Philippines), Inc., to avail of the benefit provided for in Art. 13, par. 2(b)(iii) of the RP-US Tax Treaty and pursuant thereto authorize the same to withhold tax of 10% from its royalty payments as provided for in Art. 12(2)(b) of the RP-West Germany Tax Treaty which is the lowest rate of Philippine tax imposed on royalties of the same kind paid under similar circumstances to a resident of a third state as of this date. cdt It is represented that your abovenamed client entered into a Technical Assistance and License Agreement with Nalco Chemical Company, a corporation existing under the laws of Delaware, U.S.A., whereby the latter granted your client an exclusive license to manufacture certain chemical products in the Philippines utilizing the latter's know-how in the manufacture, use and sale of the said products and in consideration of which your client will pay royalty to the latter; and that the said agreement has been duly registered with the Technology and Transfer Board (now Bureau of Patents, Trademark and Technology Transfer) on June 20, 1988 under Certificate of Registration No. 822. In reply, please be informed 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 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 limitation 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 have been approved by the Philippine competent authorities." Such being the case, and inasmuch as the know-how and Technical Assistance Agreement between Nalco Chemical Company (Philippines), Inc. and Nalco Chemical Company has been approved by the Transfer Technology Board of the Ministry (Department) of Trade and Industry, royalties arising in the Philippines and payable to Nalco Chemical Companies (U.S.A.) by Nalco Chemical Company (Philippines), Inc. are subject to the Philippine tax at the rate of 10% as of this date 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 so provided in Section 51(a) of the Tax Code, as amended. Very truly yours, (SGD.) JOSE U. ONG Commissioner