Royalties Arising in the Philippines and Payable to KCC (U.S.A.) by KCPI are Subject to the Philippine tax at the Rate of 10%

November 13, 1987 BIR RULING NO. 360-87 37-a 263-86 360-87 Gentlemen : This refers to your letter dated March 18, 1987 requesting that your client, Kimberly-Clark Philippines, Inc. (KCPI) be similarly allowed to avail of the benefits in Art. 13(2)(iii) of the RP-US Tax Treaty for the royalties payable to its principal, Kimberly-Clark Corporation (KCC) by applying the 10% tax rate in the RP-West Germany Tax Treaty. Documentary evidence submitted shows that Kimberly-Clark Philippines, Inc., a company registered under the laws of the Philippines, entered into a license and technological and Marketing assistance agreement on consumer products and for cigarette and other fine papers with Kimberly-Clark Corporation, a non-resident foreign corporation based in Neenah, Wisconsin, U.S.A., whereby KCPI was granted among others, the right to use in its business operations the licensed trademarks, licensed patents, know-how and/or technology owned by KCC (U.S.A); that the license and technological and marketing assistance agreement on consumer products dated November 1, 1983, concerning license to use trademarks, patents and know-how in the manufacture and sale of household sanitary products, disposable hygiene products and other consumer products is duly registered with the Technology Transfer Board of the Ministry (Department) of Trade and Industry under Certificate of Registration No. 0545; that the license and technological and marketing assistance agreement for cigarettes and other fine papers dated July 2, 1984, concerning the license to use trademarks, patents and know-how in the manufacture and sale of cigarette paper and other fine paper products is likewise duly registered with the Technology Transfer Board of the Ministry (Department) of Trade and Industry under Certificate of Registration No. 0551; and that for the use of the trademarks, patents and technology on consumer products, KCPI is obliged to pay KCC (U.S.A) 1 % royalty based on the total net sales of KCPI, while for the use of the trademarks, patents and technology for cigarettes and other fine papers, KCPI is obliged to pay KCC (U.S.A) 1 % royalty based on the total net sales of the licensed products by KCPI and an additional 1% royalty based on the total net sales of new cigarette and other fine papers by KCPI. atdc 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 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 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 license and technological and marketing assistance agreement on consumer products and for cigarette and other fine papers between Kimberly-Clark Philippines, Inc. and Kimberly-Clark Corporation (USA) has been approved by the Transfer Technology Board of the Ministry (Department) of Trade and Industry, royalties arising in the Philippines and payable to KCC (U.S.A.) by KCPI 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 52 of the Tax Code, as amended. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner