Withholding Tax of 10% on Royalty Fees

August 22, 1988 BIR RULING NO. 400-88 36 088-88 400-88 Gentlemen : This refers to your letter dated June 14, 1988 requesting confirmation of your opinion to the effect that the royalty fees to be remitted by your client, Pillsbury-Mindanao Flour Milling Co., Inc., to Pillsbury Holdings (Canada) Ltd. effective January 1, 1985 are subject to a withholding tax of 10% in accordance with the most favored nation provision prescribed under Article XII(2)(b)(ii) of the RP-Canada Tax Treaty. In effect, said request seeks to reconsider the BIR Ruling No. 232-88 which ruled that the said royalty fees are subject to the 25% withholding tax. Said ruling is in answer to your letter dated March 23, 1988 which did not invoke the most favored nation provision of the Tax Treaty. cdti It is represented that on July 25, 1985, a Revised Technical Assistance Agreement was entered into by your client with Pillsbury Holdings (Canada) Limited; that prior to said agreement, a similar one was entered into by said parties on April 15, 1980 which expired on December 31, 1984; that the royalties paid and/or to be paid by your office which is equivalent to "1.6% of the mill net sales receipts from all sales" are in consideration of the formulas, manufacturing specifications, ingredient specifications and other technical information and experience relating to a number of consumer food products, now being marketed in the U.S.; continuing research and development of food-cereal products services for manufacture in the Philippines; and right to use such consumer food product technology; and that the Second Renewal of Revised Technical Assistance Agreement had been registered with and approved by the Technology Transfer Board as evidenced by Certificate of Registration No. 0689 dated December 2, 1985. In reply thereto, please be informed that your opinion is hereby confirmed. Under the most favored nation provision of the RP-Canada Tax Treaty, the tax imposable on royalties derived by a resident of Canada from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid in 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 (h) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contracts giving rise to such royalties have been approved by the Philippine competent authorities. Such being the case, and inasmuch as the Second Renewal of Revised Technical Assistance Agreement between your client and Pillsbury Holdings (Canada) Ltd. has been approved by the Technology Transfer Board, royalties arising in the Philippines and payable to Pillsbury Holdings (Canada) Ltd. 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 III, paragraph 2(b)(ii) of the RP-Canada Tax Treaty. The said tax shall be withheld and paid in the same manner and subject to the same conditions provided in Section 50 of the Tax Code, as amended. cdt Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner