DA ITAD BIR Ruling No. 085-06

August 4, 2006 DA ITAD BIR RULING NO. 085-06 Art. 11 RP-UK Tax Treaty; Sec. 108 National Internal Revenue Code of 1997; Sec. 4.108-3(a) Revenue Rulings No. 16-2005; BIR Ruling ITAD No. 32-00, 25-99 BIR Ruling No. 096-95, 101-84, 046-80 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30th Floor, Citibank Tower 8741 Paseo de Roxas, City of Makati, Philippines Attention: Ms. Priscilla B. Valer Gentlemen : This is in reference to your letter dated April 27, 2006, requesting confirmation of your opinion that the royalties paid by Reckitt Benckiser Philippines, Inc. (RBPI) to your client, Reckitt & Colman (Overseas) Limited (R&C), would be subjected to the preferential tax rate of 25% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (RP-UK Tax Treaty). From the documents submitted it is represented that R&C is a corporation organized and existing under the laws of England and Wales with registered office at 103-105 Bath Road, Slough, SL13UH, UK as supported by the Residence Certificate issued by HM Revenue & Customs on February 13, 2006, and confirmed by the Philippine Embassy on February 24, 2006; that R&C is not registered either as a corporation or partnership in the Philippines as supported by the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on April 26, 2006; that RBPI is a corporation organized and existing under the laws of the Philippines with principal office at Unit 2601 The Orient Square Building, Emerald Avenue, Ortigas Center, Pasig City, Metro Manila; that R&C and RBPI entered into a License Agreement whereby R&C, as licensor, granted RBPI, as licensee, the right to use the Intellectual Property Rights, defined in the License Agreement to mean the Trademarks (including service marks), Patents, Design and Model Rights, Know-How and all current and future copyrights and rights to databases relating to the design, production, distribution, marketing and sale of the household, health, and personal care products developed and prepared for launch by the R&C and subsequently launched and marketed by RBPI; that in consideration, RBPI shall pay R&C a royalty in the amount of: (i) 4% if the relevant trademark is not owned by RBPI and (ii) 3% of the net revenues of the products if the relevant trademark is owned by RBPI; and that the License Agreement: shall commence on the Commencement Date specified therein and shall continue for an indefinite period of time, unless terminated earlier in accordance with the terms thereof. In reply, please be informed that Article 11 of the RP-UK Tax Treaty provides: "Article 11 ROYALTIES 1. Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. 2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity or (ii) in respect of cinematograph films or tapes for television or radio broadcasting. b) in all other cases, 25 per cent of the gross amount of the royalties. 3. The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on a trade or business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Articles 7 or 13, as the case may be, shall apply. 5. Royalties shall be deemed to arise in a Contracting State where the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with which the obligation to pay the royalties was incurred and the royalties are borne by that permanent establishment or fixed base, then the royalties shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 6. Where, owing to the special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties paid, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention." This means that in order for R&C to claim the 25% preferential tax rate, the following requisites must be proven to concur: 1. R&C is a resident of the United Kingdom; 2. R&C is not carrying on trade or business in the Philippines through a permanent establishment situated in the Philippines; 3. RBPI is not registered with the Philippine Board of Investments and engaged in preferred areas of activity; EaSCAH 4. R&C is not receiving royalty payments in respect of cinematograph films or tapes for television or radio broadcasting. From the facts as you have represented above it can be ascertained that R&C possesses all the requisites necessary to qualify for the 25% preferential tax rate provided under Article 11 12(b) of the RP-UK Tax Treaty. It is important to note that as provided in Section 108 of the National Internal Revenue Code of 1997, as amended, the royalty payments to be remitted by RBPI will still subject to the twelve percent (12%) Value-added Tax (VAT): "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to . . . percent . . . of gross receipts derived from the sale or exchange of services. . . The phrase 'sale or exchange of services' means . . . and . . . shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" In connection with this, attention should also be taken of Sec. 4.108-3(a) of Revenue Regulations No. 16-2005 dated September 1, 2005, which provides: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner in the manner prescribed in Sec. 4. 114-2(b) hereof." In. view of the foregoing, this Office is of the opinion and so holds that the royalties paid by RBPI to R&C under the License Agreement are subject to Philippine income tax at 25% of the gross amount of the royalties, pursuant to the RP-UK tax treaty, and to VAT at 12% of the gross amount thereof. With regard to the procedures for withholding and paying the VAT, RBPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to R&C. In remitting the VAT withheld, RBPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from RBPI if it is a VAT-registered taxpayer. In case RBPI is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, RBPI is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for R&C and the fourth copy for RBPI as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be null and void. DCASIT Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service