Royalties of a Non-Resident U.S. Corporations

September 16, 1988 BIR RULING NO. 456-88 36 (a) 088-88 456-88 Gentlemen : This refers to your letter dated August 11, 1988 requesting confirmation of your opinion to the effect that the royalties payable by your client, IBM Philippines, Incorporated (IBM Phils.) to IBM World Trade Corporation (World Trade) and International Business Machines Corporation (IBM), both non-resident U.S. corporations pursuant to an agreement entered into by said companies are subject to a 10% withholding tax pursuant to Art. 13, par. 2(b)(iii) of the RP-US Tax Treaty in relation to Art. 12, par. 2(b) of the RP-West Germany Tax Treaty. It is represented that IBM, a non-resident foreign corporation organized under the laws of the state of New York, U.S.A., has granted World Trade, also a non-resident foreign corporation organized under the laws of the state of New York, U.S.A., a license, including the right to sublicense its (World Trade's) subsidiaries under all patents, inventions and copyrights and under all proprietary rights in programs, with respect to which patents, inventions, copyrights and proprietary rights, IBM has the right to grant such license; that IBM has also granted World Trade and its subsidiaries the right to use trade names and trademarks owned or registered by IBM; that World Trade, in turn, in an agreement dated September 1, 1982, has sublicensed to its subsidiary, IBM Phils., a domestic corporation, the aforesaid rights and, in addition, has agreed to provide to IBM Phils. technical knowledge and know-how; that pursuant to said agreement, World Trade granted IBM Phils. a license to use all trademarks owned and/or registered by IBM in the Philippines on or in association with Information Handling System Products (IHS) and to use in its trade names the trademarks "IBM", a non exclusive license, under IBM's copyrights, to use machine readable copies of Programs in revenue producing activities or internally and to grant a single license with respect to each such Program copy for use by a customer, to provide available technical knowledge and know-how relative to the use, manufacture, programming, marketability, service, maintenance, education of users and systems engineering of IHS Products; that in consideration of the licenses and trademark/trade names rights granted and the technical knowledge and know-how provided to IBM Phils. by World Trade pursuant to the World Trade Agreement, IBM Phils. agreed to pay World Trade royalties equivalent to 10% of the gross charges less returns and allowances, made during each calendar month by IBM Phils. to its customers for the sale, service, lease and/or installation of IHS Products; that the World Trade Agreement which had a term of five (5) years, expired on August 31, 1987; that IBM Phils. and World Trade renewed the agreement by executing a new agreement dated July 7, 1987 for a period of five (5) years expiring on August 31, 1992; that the World Trade Agreement and the renewals thereof have been duly approved by the Central Bank of the Philippines; that on January 1, 1988 IBM Phils. entered into an agreement with IBM with respect to licensing of IBM Programs and access to and use of technical knowledge and know-how relating to IBM Programs; that pursuant to the agreement, IBM (1) granted to IBM Phils. under IBM's copyrights, mask work rights and patents the non exclusive rights to: (a) license and distribute copies of IBM Programs from their ultimate customers; (b) use the IBM Programs in revenue producing activities; (c) use the IBM Programs internally; (d) make or have made copies for the purposes described above, for distribution to affiliate companies and for translation or modification of such IBM Programs; (e) allow IBM Phils. customers to use, make copies of and modify the IBM Programs pursuant to the terms of IBM Phils. agreements with its customers; (2) granted IBM Phils. the right to use all of IBM's trademarks on or in association with IBM Programs; (3) agreed to provide to IBM Phils. available technical knowledge and know-how relating to the reproduction, use, modification, marketability, education of users, service and maintenance of IBM Programs; that in consideration of the said rights granted and the technical knowledge and know-how provided to IBM Phils. by IBM pursuant to said agreement, IBM Phils. agreed to pay IBM royalties equivalent to 40% of all revenues including discounts and other allowances billed or accrued during each calendar month by IBM Phils. for each copy of an IBM Program which IBM Phils. authorized, licensed or distributed to any non-affiliated party or 40% of the unit of one price that IBM Phils. would bill a third party for the licensing or authorizing to use IBM Programs for each copy of an IBM Program that IBM Phils. uses internally; that the IBM Agreement is valid for a period of one (1) year commencing on January 11, 1988, and thereafter, shall continue in full force and effect until terminated or modified in accordance with its terms; and that the IBM Agreement has likewise been duly approved by the Central Bank of the Philippines. In reply, I have the honor the inform you that your opinion is hereby confirmed. 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 limitations 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 has been approved by the Philippine competent authorities. cdtech Such being the case, and inasmuch as the Agreement between World Trade and IBM Phils. as well as the Agreement between IBM and IBM Phils. had been approved by the Central Bank of the Philippines, royalties arising in the Philippines and payable to World Trade as well as to IBM by IBM Phils. 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 50 of the Tax Code. Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner