Imposition of Lowest Tax Rate on Royalties Derived by a US Resident from Sources within the Philippines

November 27, 1986 BIR RULING NO. 263-86 37-a 000-00 263-86 Gentlemen : This refers to your letter dated April 21, 1986 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 McDonald's (USA), by applying the rate of 10% tax on royalties, as provided for in the RP-West Germany Tax Treaty. Documentary evidence submitted shows that McGeorge Food Industries, Inc., a duly registered wholly-owned domestic corporation, entered into a license agreement with McDonald's Corporation, a non-resident foreign corporation based in Delaware, U.S.A., whereby McGeorge was granted among others, the right to use in its business operations the trade mark, secret formula, technology and/or patented process owned by McDonald's (USA); that the license agreement dated October 7, 1985, concerning the operation and development of restaurant is duly registered with the Technology Transfer Board of the Ministry of Trade and Industry under Certificate of Registration No. 0638 and is valid for five (5) years from May 8, 1985 to May 7, 1990; and that for the use of the formula or technology, McGeorge is obligated to pay McDonald's (USA) a certain amount of royalty based on a percentage of gross sales to be remitted on a quarterly basis. 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 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 charge shall not exceed 10% of the gross amount of royalties arising from the use of or the right to use, any patent, trade mark, 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 contract giving rise to such royalties have been approved by the Philippine competent authorities." Such being the case and in as much as the license agreement between McGeorge and McDonald's has been approved by the Transfer Technology Board of the Ministry of Trade and Industry, royalties arising in the Philippines and payable to McDonald's (USA) by McGeorge Food Industries, 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 condition as provided in Section 52 of the Tax Code, as amended. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner of Internal Revenue