Tax Consequences of Royalty Payments

May 20, 1987 BIR RULING NO. 133-87 37-a 263-86 133-87 Gentlemen : This refers to your letter dated November 3, 1986 requesting reconsideration of BIR Ruling No. 37-a-000-00 009-84 dated January 17, 1984 to the effect that the most favored nation clause provided for under Article 13 (2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-Austria Tax Treaty, Article 12, par. 3, providing for a 10% withholding tax on royalties paid to a resident of Austria by a Philippine BOI registered pioneer enterprise, is not applicable. The tax consequences of royalty payments under the two treaties are not under "similar circumstances". Under the RP-Austria Tax Treaty, there is a matching credit of 15% of the gross amount of the royalties (Art. 23, par. 3), while under the RP-US Tax Treaty there is no similar credit. In reply thereto, I have the honor to inform you that after a re-study, this Office finds the said request to be meritorious and hereby grants the same. 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 (3) of the RP-Austria Tax Treaty, effective April 4, 1981 provides that the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines registered with the Board of Investments and engaged in preferred pioneer areas of investments under the investment incentives laws of the Philippines to a resident of Austria, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. Such being the case, and inasmuch as Columbian Carbon Philippines (CCPI) Inc. is a BOI registered pioneer enterprise, royalties arising in the Philippines and payable by CCPI to Columbian International Chemical Company (U.S.) are subject to the Philippine tax at the rate of 10% because this rate appears in the RP-Austria 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 52 of the Tax Code, as amended. This revokes BIR Ruling No. 37-a-000-00-009-84 dated January 17, 1984. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner