DA ITAD BIR Ruling No. 127-06

October 23, 2006 DA ITAD BIR RULING NO. 127-06 Article 13 (Royalties) Philippines-United States of America tax treaty Sections 23(F), 42 (A) (3), 105, 108 (A) and 109 (q) National Internal Revenue Code of 1997 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated August 19, 2005 requesting confirmation of the following: 1. That the payments for the Electronic Data Automation (EDA) Costs to be made by TI Philippines Inc . ( TI Philippines ) to Texas Instruments Incorporated (Texas Instruments) (originally, Geophysical Service Inc .) under an Information Technology Service Agreement (Agreement) are payments for 'know-how', and, therefore, royalties, which are subject to 10% income tax under Article 13 of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (Philippines-United States tax treaty), in relation to Article 12 of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-China tax treaty); 2. That the payments for the Other Information Technology (IT) Costs to be made by TI Philippines to Texas Instruments under the Agreement are payments for services and not royalties; and 3. That the payments for the EDA costs and for the other IT costs are exempt from value-added tax (VAT). Basic facts It is represented that Texas Instruments is a corporation organized and existing under the laws of the United States of America, with registered office at 1209 Orange Street, City of Wilmington, County of New Castle, State of Delaware, United States of America (as confirmed by its Restated Certificate of Incorporation dated April 18, 1985), and with principal place of business at 12500 TI Boulevard, Dallas, Texas 75423, United States of America (as indicated in the Information Technology Service Agreement dated January 1, 2005); that Texas Instruments is not registered as a corporation or as a partnership in the Philippines, as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated May 27, 2005 issued by the Securities and Exchange Commission; that, on the other hand, TI Philippines is a corporation organized and existing under the laws of the Philippines, with office address at Baguio City Economic Zone, Loakan Road, Baguio City, Philippines; that TI Philippines is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Baguio City Economic Zone under Certificate of Registration No. 01-010 dated March 1, 2001 and under the Registration Agreement also dated March 1, 2001; and that TI Philippines ' business activities consist in (1) the manufacture, assembly and fabrication of products in the electronics industry and other articles of kindred nature, upgrading of test and quality production processes, and production of Quad Flat Pack "QFP", (2) the manufacture of Flip Chip-BGA package, and (3) the manufacture of Generic Ball Grid Array (g-BGA). aTEHCc It is further represented that on January 1, 2005, Texas Instruments and TI Philippines entered into an Information Technology Service Agreement (Agreement), with an initial effectivity of one year from January 1, 2005, and renewable automatically for succeeding one-year periods; that under the Agreement, Texas Instruments agreed to grant to TI Philippines services relating to certain phases of its information technology needs, including but not limited to, upgrades, maintenance, repair, modification, management, coordination, security, and implementation of global information systems and computer software including but not limited to SAP, ORACLE, Peoplesoft, Unix, and Electronic Design Automation software used for product design and verification, information technology training on the use of systems employed by Texas Instruments , and access to other Texas Instruments Information Technology services and support such as batch processing, inquiring services, on-line system input/output services, off-line system input/output services, magnetic tape service, disk storage service, data conversion service, data archiving and applications programming; that Texas Instruments will assign such personnel to the execution of the services as will ensure the expeditious and efficient performance of the services, and that Texas Instruments may choose to subcontract such services to third parties at its discretion; that services provided by Texas Instruments will be performed in the United States; that in consideration, TI Philippines will pay Texas Instruments an amount, in United States dollars, allocated by the latter in the following manner: 1. Electronic Data Automation (EDA) Costs . The EDA costs incurred by Texas Instruments and subject to allocation and reimbursement will be allocated to TI Philippines based on the number of seconds TI Philippines personnel (i.e., employees and subcontractors) are logged on to any of the EDA software packages provided by Texas Instruments to TI Philippines . 2. Other IT Costs . Other IT costs will be allocated to TI Philippines on the basis of a fixed activity based per person charge. that any costs incurred by Texas Instruments not covered by the per-second of use charge or by the per-person charge will be allocated to TI Philippines on a mutually agreed basis; AND that Texas Instruments will periodically notify TI Philippines of the amounts of the cost per second and per person charge used to determine the allocable charge. In addition, it is represented that the payments for the EDA Costs are compensation for the provision of information or 'know-how' by Texas Instruments to TI Philippines relating to the global information systems and computer software including SAP, ORACLE, Peoplesoft, Unix, and Electronic Design Automation used for product design and verification, and access to other Texas Instruments Information Technology services and support such as batch processing, inquiring services, on-line system input/output services, off-line system input/output services, magnetic tape service, disk storage service, data conversion service, data archiving and applications programming; and that, on the other hand, the payments for the Other IT Costs are compensation for the provision of services such as upgrades, maintenance, repair, modification, management, coordination, security, training and implementation of the global information systems; and that Texas Instruments ' will provide the services in the United States using its customary skills. Finally, it is also represented that based on the letter of the Intellectual Property Office dated February 18, 2005, the Agreement does not comply with certain provisions of Sections 87 and 88, Article IX (Voluntary Licensing) of the Intellectual Property Code, particularly: AEDCHc 1. Section 88.1 , which states that the Philippine laws shall govern the interpretation of the Agreement and that in the event of litigation, the venue shall be the proper court in the place where TI Philippines , the licensee, has its principal office; and 2. Section 88.4 , which requires that the Philippine taxes on all payments relating to the technology transfer arrangement shall be shouldered by Texas Instruments , the licensor. Ruling In reply please be informed as follows. 1. The payments for the EDA Costs are royalties . With respect to the payments for the EDA Costs, inasmuch as they are compensation for the provision of information or 'know-how' relating to the global information systems and computer software, and access to other Texas Instruments Information Technology services and support, the payments for the EDA Costs are royalties, such payments being considered payments for information concerning industrial, commercial or scientific experience under paragraph 3, Article 13 of the Philippines-United States tax treaty: "Article 13 ROYALTIES 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. However, the tax imposed by that other Contracting State shall not exceed a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) 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. 3. The term 'royalties' as used in this Article means payments 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 cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience . The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof." (emphasis supplied) DIETcH In addition, because Texas Instruments will provide the subject information to TI Philippines through Electronic Commerce (E-Commerce) means where the payments for the EDA Costs are computed based on the number of seconds TI Philippines personnel are logged on to any of the EDA software packages, such payments are characterized as royalties, based on the Report entitled 'Tax Treaty Characterization Issues Arising from E-Commerce' and dated February 1, 2001, prepared by the Technical Advisory Group on Treaty Characterisation of Electronic Commerce Payments of the Organisation for Economic Co-operation and Development (OECD). The payments for the EDA Costs are under Category 19 of the Report, which provides: "Category 19: Technical information Definition The customer is provided with undivulged technical information concerning a product or process (e.g., narrative description and diagrams of a secret manufacturing process). Analysis and conclusions : 33. The Group agrees that payments arising from this category of transactions constitute royalties as they are made for the supply of know-how, i.e., 'for information concerning industrial, commercial or scientific experience ." (emphasis supplied) Being royalties, the payments for the EDA Costs are subject to the income tax rates mentioned in paragraph 2(b), Article 13 of the Philippines-United States tax treaty; subparagraph (iii) thereof provides that the payments are subject to the lowest rate of income tax that may be imposed on the royalties of the same kind paid under similar circumstances to a resident of a third State (commonly known as the most-favored-nation tax treatment of royalties). In relation to the most-favored-nation tax treatment of royalties, the Supreme Court, in Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals (G.R. No. 127105 dated June 25, 1999), has cited two conditions for royalties arising in the Philippines and derived by a resident of another country (in this case, the United States) to be subject to a most-favored-nation tax treatment. First , the royalties in question derived by a resident of the other country (the United States) must be of the same kind as those derived by a resident of the third country which are subject to a most-favored-nation tax treatment under the existing tax treaty between the Philippines and the third country. Secondly , the mechanism employed by the other country (the United States) in mitigating the effects of double taxation of foreign-sourced income derived by its residents must be the same with that employed by the third country, which can be determined by taking into account and comparing the respective articles on Elimination of Double Taxation of the other country (the United States) and the third country under their respective tax treaties with the Philippines. In looking for a third country that grants a most-favored-nation tax treatment on royalties, you cited China and, accordingly, the Philippines-China tax treaty whose Article 12 provides: "Article 12 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: ScaAET a) 15 percent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, 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. 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 has been approved by the Philippine competent authorities." Under Article 12 of the Philippines-China tax treaty, royalties for information concerning industrial, commercial or scientific experience (to which payments for the EDA Costs are assimilated), and even royalties for the use or the right to use of any patent, trade mark, design or model, plan, secret formula or process, or any industrial, commercial, or scientific equipment, are subject to 10% income tax based on the gross amount of the royalties. This is on the condition that the contracts that give rise to the royalties are approved by the proper Philippine competent authority, namely, the Intellectual Property Office of the Philippines. As to the condition that the contracts that give rise to royalties are approved by the Intellectual Property Office, we take note that based on the letter of the Intellectual Property Office dated February 18, 2005, the Information Technology Service Agreement between Texas Instruments and TI Philippines does not comply with all of the provisions of Sections 87 and 88, Article IX (Voluntary Licensing) of the Intellectual Property Code. This being so, we understand that the non-compliance of the Agreement means that the same is not approved by the Intellectual Property Office, and, therefore, the desired 10% income tax rate on the payments for the EDA Costs, using the Philippines-China tax treaty as a basis, cannot be given due course. Nonetheless, we are pleased to inform you that other than the Philippines-China tax treaty, the 10% income tax rate on royalties is also available under the Convention between the Czech Republic and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Czech tax treaty), which entered into force recently on September 23, 2003 and whose provisions on taxes apply on income derived or which accrued beginning January 1, 2004. Unlike the Philippines-China tax treaty, the 10% rate under the Philippines-Czech tax treaty can be availed of even without the approval by the Intellectual Property Office of the contract that gives rise to the royalty payments, as such requirement is lacking in Article 12 of this tax treaty, to wit: "Article 12 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. DETcAH 2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work, other than that mentioned in sub-paragraph (b), any patent, trade mark, 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; b) 15 per cent of the gross amount of the royalties arising from the use of, or the right to use, any copyright of cinematograph films, and films or tapes for television or radio broadcasting. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations." Using the Philippines-Czech tax treaty as a basis for the grant of the 10% preferential tax rate, it is noteworthy that for purposes of the first condition of the most-favored-nation tax treatment, under paragraph 2(a), Article 12 of the tax treaty, royalties for information concerning industrial, commercial or scientific experience (to which payments for the EDA Costs are assimilated), and even royalties for the use or the right to use of any copyright of literary, artistic or scientific work (except copyright on cinematograph films, and films or tapes for television or radio broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or any industrial, commercial or scientific equipment, are subject to 10% income tax based on the gross amount of the royalties. As mentioned previously, the 10% rate can be availed of even without the approval by the Intellectual Property Office of the contract that gives rise to the royalty payments. As to the second condition for the most-favored-nation tax treatment, it is noteworthy that the United States and Czech employ the same mechanism in mitigating the effects of double taxation of foreign-sourced income derived by their residents, that is, the ordinary credit method , as provided under their respective articles on Elimination of Double Taxation of their tax treaties with the Philippines, to wit: United States : "Article 23 RELIEF FROM DOUBLE TAXATION Double taxation of income shall be avoided in the following manner: 1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid or accrued to the Philippines, the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For purposes of applying the United States credit in relation to taxes paid or accrued to the Philippines, the taxes referred to in paragraphs 1(b) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes." TCADEc Czech : "Article 22 ELIMINATION OF DOUBLE TAXATION xxx xxx xxx 2. In the case of a resident of the Czech Republic, double taxation shall be eliminated as follows: a) The Czech Republic, when imposing taxes on its residents, may include in the tax base upon which such taxes are imposed the items of income which according to the provisions of this Convention may also be taxed in the Philippines, but shall allow as a deduction from the amount of tax computed on such a base an amount equal to the tax paid in the Philippines. Such deduction shall not, however, exceed that part of the Czech tax, as computed before the deduction is given, which is appropriate to the income which, in accordance with the provisions of this Convention, may be taxed in the Philippines. b) Where in accordance with any provision of the Convention income derived by a resident of the Czech Republic is exempt from tax in the Czech Republic, the Czech Republic may nevertheless, in calculating the amount of tax on the remaining income of such resident, take into account the exempted income." Under the ordinary credit method , the United States and Czech (as countries of residence) would limit a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in their countries that is attributable to the income that is taxed in the Philippines (the country of source or country of situs). As a result of this limitation, if the Philippines has an effective tax rate that exceeds the effective tax rate of the United States and Czech on a particular income, the United States and Czech would not grant the taxpayer a full credit for the income tax imposed by the Philippines on such income. Under the article on Elimination of Double Taxation of the Philippines-Czech tax treaty, Czech applies the ordinary credit method to all items of income derived by its residents from sources in the Philippines and which may be taxed in the Philippines in accordance with the provisions of the tax treaty (paragraph 2(a), Article 22 of the tax treaty). In addition, Czech retains the right to take the amount of income exempted in Czech into consideration when determining the tax to be imposed on the rest of the income (paragraph 2(b), Ibid .). In fine, because the two conditions for the most-favored-nation tax treatment on royalties under the Philippines-United States and the Philippines-Czech tax treaties are both satisfied, this Office is of the opinion and so holds that the payments for the EDA Costs to be made by TI Philippines to Texas Instruments under the Information Technology Service Agreement are subject to 10% income tax rate based on the gross amount thereof, under paragraph 2(b)(iii), Article 13 of the Philippines-United States tax treaty in relation to paragraph 2(a), Article 12 of the Philippines-Czech tax treaty. 2. The payments for the Other IT Costs are payments for services . Inasmuch as the payments for the Other IT Costs are compensation for services provided by Texas Instruments to TI Philippines , including upgrades, maintenance, repair, modification, management, coordination, security, training and implementation of the global information systems, and the services are performed in the United States using Texas Instruments ' customary skills, and the payments are computed on the basis of a fixed activity based per person charge, the payments for the Other IT Costs are truly payments for services and not royalties. DCaEAS Being performed in the United States, the subject services are not considered as being derived from sources within the Philippines, under Section 42(A)(3) of the National Internal Revenue Code of 1997 (Tax Code), and the payments for the services, being derived by a foreign corporation, are exempt from income tax, based on Section 23(F) of the Tax Code, to wit: "SEC 42. Income from Sources Within the Philippines . (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (3) Services . Compensation for labor or personal services performed in the Philippines;" "SEC 23. General Principles of Income Taxation in the Philippines . Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In fine, because the services that give rise to the payments for the Other IT Costs are not derived from sources within the Philippines and such payments are made to a foreign corporation, this Office is of the opinion and so holds that the payments for the Other IT Costs to be made by TI Philippines to Texas Instruments under the Information Technology Service Agreement are exempt from income tax, under Sections 42(A)(3) and 23(F) of the Tax Code. (BIR Ruling No. DA-ITAD 97-05 dated September 2, 2005) 3. The payments for the EDA Costs and for the Other IT Costs are exempt from VAT. The payments for the EDA Costs, being compensation for the supply of know-how or information concerning industrial, commercial or scientific experience, are generally subject to VAT, under Section 108(A)(3) of the Tax Code: "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 ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration. . . The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information ;" 1 (emphasis added) On the other hand, with respect to the payments for the Other IT Costs, pursuant to Section 108(A) above, such payments are not subject to VAT because the services that give rise to the payments are not performed in the Philippines. (BIR Ruling No. DA-ITAD 97-05 dated September 2, 2005) IAcTaC However, with respect to the payments for the EDA Costs, the same can be exempt from VAT pursuant to Section 109(q) of the Tax Code, where the transaction that gives rise to the payments are exempt under special laws: "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590;" 2 In relation thereto, Section 24 of Republic Act No. 7916 (An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes) and Section 1, Rule XIV (Incentives to ECOZONE Developers/Operators) of the Rules and Regulations to Implement this Act, provide VAT exemption, among others, to TI Philippines and other PEZA-registered enterprises, to wit: "Section 24. Exemption from Taxes Under the National Internal Revenue Code . Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent of the gross income earned by all business and enterprises within the ECOZONE shall be remitted to the national government. . ." "Section 1. ECOZONE Developers/Operators . ECOZONE Developers/Operators shall be entitled to the following incentives: A. Exemption from National and Local Taxes and Licenses . An ECOZONE Developer/Operator shall to the extent of its construction and operation, be exempt from payment of all national internal revenue taxes and local government impost, fees, licenses or taxes, including but not limited to the following: 1. Internal revenue taxes such as gross receipts tax, value-added tax, ad valorem and excise taxes; 2. Franchise, common carrier or value added taxes and other percentage taxes on public and service utilities and enterprises." Under Section 105 of the Tax Code, since VAT is an indirect tax, the VAT on the payments for the EDA Costs may be shifted or passed on by Texas Instruments to TI Philippines : "SEC 105. Persons Liable . Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT) imposed in Sections 106 to 108 of this Code. The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services . . ." However, pursuant to Section 24 of Republic Act No. 7916 which provides that TI Philippines and other PEZA-registered enterprises are exempt from VAT and other internal revenue taxes, Texas Instruments cannot shift or pass on the VAT to TI Philippines ; hence, the transaction that gives rise to the payments for the EDA costs is exempt from VAT. ( Commissioner of Internal Revenue vs. Seagate Technology (Philippines) , G.R. No. 153866 dated February 11, 2005) HSacEI The same conclusion is reached in VAT Ruling No. 100-99 dated September 16, 1999, the dispositive portion of which provides: " In the case of payment for royalties to a non-resident owner, the responsibility for withholding the VAT and paying the same rests on the payor. However, since PEZA-registered export enterprise may not be passed on with nor claim input VAT, then payment of royalties to a non-resident lessor , . . . , should be as it is hereby confirmed to be, exempt from VAT. " (BIR Ruling Nos. DA-ITAD 112-05 dated September 30, 2005) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue Footnotes 1. Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "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 ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . . The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information;" The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006. 2. Republic Act No. 9337 renumbered and amended Section 109(q) thus: "SEC. 109. Exempt Transactions . (1) Subject to the provisions of Subsection (2) hereof the following transaction shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529;"