Royalty Benefits of Article 13(2)(iii) of the RP-US Tax Treaty

July 12, 1988 BIR RULING NO. 305-88 36359-87305-88 Gentlemen : This refers to your letter dated January 5, 1988 requesting that your client, Globe Mackay Cable and Radio Corporation (GMCR), be allowed to avail of the benefits of Article 13(2)(iii) of the RP-US Tax Treaty for the royalties (advisory fee) payable to International Telegraph and Telecommunication (ITT) by applying the 10% tax rate in the RP-West Germany Tax Treaty. It is represented that GMCR, a domestic corporation entered into a Technical Service Agreement with ITT Corporation a U.S. corporation which is not licensed to do business in the Philippines, whereby the latter will render the following technical advise and assistance to GMCR: "(a) That it will use its best endeavors to ascertain and keep informed of all fundamental work, in the line of research, investigation and experimentation in the development of the art and science of telephony and telegraphy, and in the development of plans, methods, systems and ideas designed to promote construction and operation of the telephone and telegraph installations of Globe-Mackay, and will supervise any and all development work to be done by others for the production of materials and apparatus necessary for rendering the products of such work available for use by Globe-Mackay. "(b) That from time to time it will give advice and assistance in general engineering, plant, traffic, operating, commercial accounting (including the auditing of accountants), patent, legal, marketing, administrative and other matters pertaining to the efficient, economical and successful conduct of the business of Globe-Mackay; such advice and assistance to be given by ITT through the issuance to Globe-Mackay of data, discussion and conclusions including bulletins, books, circular letters and standard specifications and blue prints, and through the performance of specific work in cases of unusual magnitude and complexity where such work is necessary or desirable or when so requested by Globe-Mackay." In reply, I have the honor to inform you that your request is hereby granted. Under Article 13, paragraph (3) of the RP-US Tax Treaty, the term "royalties" means payments of any kind received as consideration, among others, for information concerning industrial, commercial or scientific experience. The "advisory fees" in question, paid by your client are, therefore, considered royalties since they are payments for the said kind of information. Under the most favored nation provision of the RP-US Tax Treaty [Article 13, paragraph 2(b)(iii)], the tax impossible 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, trademark, design or model, plan, secret formula or process, or from 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 inasmuch as the Technical Service Agreement between GMRC and ITT has been approved by the Transfer Technology Board of the Department of Trade and Industry, royalties (advisory fee) arising in the Philippines and payable to ITT by GMRC 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 51 of the Tax Code, as amended. cdtech Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner