Rate of Withholding Tax on Royalties and Technical Assistance and Know-How Fee

November 9, 1988 BIR RULING NO. 533-88 36-a 444-88 533-88 Gentlemen : This refers to your letter dated June 10, 1987 requesting a ruling on the correct rate of withholding tax on royalties and technical assistance and know-how fee payable by your client, Philippine Cocoa Corporation (PCC) to Hershey Foods Corporation (HFC), a Delaware corporation with principal place of business at 100 Mansion Road East, Hershey, Pennsylvania, U.S.A. through its subsidiary, Hershey International, Ltd. It is represented that on July 30, 1985, a Trademark, Trade secrets, Technical Assistance and Know-how Licensing Agreement was entered into by and between HFC as Licensor and PCC as Licensee, Monterey Farms Corporation, the owner of approximately 17% of the outstanding shares of PCC and the stockholders of PCC; that in accordance with the said agreement HFC grants PCC an exclusive license to the trademark "Hersheys" and other trademarks of HFC listed on Exhibit ii as being related to a class B Product in connection with the manufacture and sale of class B Products, which grant is limited solely to the Philippines and solely to said Products and which grant shall extend in like manner to the trademark HFC associated with a Class C Product listed on Exhibit ii and added in accordance with Section XIX of the agreement at the time of such addition (the trademark "Hersheys" and any trademark so added shall be referred to herein as the Licensed Trademark or Trademarks, as the case may be); that in addition, HFC grants PCC a license to utilize the Trade Secrets and Technical Assistance and Know-how provided by HFC solely in the Philippines and solely in connection with the manufacture and sale of the Class B Products and any Class C Products added in accordance with Section XIX of the agreement which license shall include the non-exclusive right to manufacture said products under other trademarks which HFC may specify for export and to utilize the Technical Assistance and Know-how provided by HFC in connection with the manufacture and sale of Class A Products; that in consideration of the licenses granted and the Trade Secrets and Technical Assistance and Know-how, PCC agrees to pay HFC a royalty of: (1) Two percent (2%) of net sales on all export sales of the Products when sold as finished products and all other products manufactured by PCC utilizing a Class B or Class C Product as an ingredient, or which are partially or totally made with the use of Trade Secrets supplied by HFC for a Product or Products; that three percent (3%) of net sales on all domestic sales (sales in the Philippines) of Class B and Class C Products sold as finished products and all other products manufactured by PCC utilizing a Class B or Class C Product as an ingredient, or which are partially or totally made with the use of Trade Secrets supplied by HFC for a Product or Products, provided, however, that such royalty shall be reduced automatically to two percent (2%) of net sales of a particular Class B or Class C Product commencing on the fifth anniversary of the actual commencement of Production in Commercial Quantities for such Class B or Class C Product regardless of when it was contemplated under the Prior Agreement that such Production in Commercial Quantities would first commence; that two percent (2%) of the net sales on all domestic sales of Class A Products not included above; that PCC agrees to compensate HFC for the personnel costs HFC incurs in providing technical assistance and know-how and advise to PCC which shall not exceed $100.00 per day and which shall be paid to HFC; that travel, lodging, food, transportation, and other miscellaneous expenses incurred in providing such information, assistance and advice shall be for the account of PCC; and that the Trademark, Trade Secrets, Technical Assistance and Know-how Licensing Agreement and the Amendment Agreement has been registered with and approved by the Technology Transfer Board as evidenced by Certificate of Registration No. 0640 dated January 16, 1986. cdtech In reply, I have the honor to inform you that under the most favored 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 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 Trademark, Trade secrets, Technical Assistance and Know-how Licensing Agreement between Hershey Foods Corporation and Philippine Cocoa Corporation has been approved by the Technology Transfer Board, Department of Trade and Industry, royalties arising in the Philippines and payable to Hershey Foods Corporation by Philippine Cocoa Corporation 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. cdt Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner