Withholding Tax of 10% on Royalty Payments

September 15, 1988 BIR RULING NO. 444-88 36-a 359-87 444-88 Gentlemen : This refers to your letter dated July 27, 1988 requesting a ruling allowing your client, Borden International Philippines, Inc., to avail of the benefit provided for in Art. 13 par. 2(b)(iii) of the RP-US Tax Treaty and pursuant thereto authorize the same to withhold tax of 10% from its royalty payments as provided for in Art. 12(2)(b) of the RP-West Germany Tax Treaty which is the lowest rate of Philippine tax imposed on royalties of the same kind paid under similar circumstances to a resident of a third state as of this date. cdti It is represented that your abovementioned client entered into a Know-How and Technical Assistance Agreement with Borden, Inc., a corporation existing under the laws of New Jersey, U.S.A., whereby the latter granted your client an exclusive license to manufacture in the Philippines all those products which the latter is presently manufacturing as well as such other products which may be added from time to time upon mutual agreement utilizing the know-How in the manufacture, use and sale of the said products and in consideration of which your client will pay royalty to the latter; and that the said agreement was registered with the Technology and Transfer Board on March 11, 1985 under Certificate of Registration No. 0577. 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 in as much as the know-How and Technical Assistance Agreement between Borden International Philippines, Inc. and Borden, Inc. has been approved by the Transfer Technology Board of the Ministry (Department) of Trade and Industry, royalties arising in the Philippines and payable to Borden, Inc. (U.S.A.) by Borden International Philippines, Inc. are subject to the Philippine tax at the rate of 10% as of this date 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(a) of the Tax Code, as amended. cdta Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner