ITAD BIR Ruling No. 108-12

February 24, 2012 ITAD BIR RULING NO. 108-12 Article 12 of the Philippines-France tax treaty; BIR Ruling No. ITAD 123-00; BIR Ruling No. ITAD 092-02; BIR Ruling No. ITAD 108-01; BIR Ruling No. ITAD 180-00 Nisce Mamuric Guinto Rivera & Alcantara Law Offices 8th Floor, 139 Corporate Center 139 Valero Street, Salcedo Village Makati City, Philippines 1227 Attention: Emelyn W. Corpus-Martinez Mischelle R. Maulion-Jocson Gentlemen : This refers to your tax treaty relief application filed on July 1, 2009, on behalf of your client, AIR LIQUIDE PHILIPPINES, INC. ("ALPHIL") , requesting confirmation that royalties paid to L'AIR LIQUIDE, S.A. ("ALSA") are subject to the 15 percent preferential tax rate, pursuant to Article 12 of the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty"). It is represented that ALSA is a corporation duly organized and existing under the laws of France with principal place of business at 75 Quai d'Orsay, 75007 Paris, France per Memorandum and Articles of Association; that it is registered under Identification number Paris 552 096 281 with the Registry of the Paris Commercial Court; that it is not registered as a corporation or partnership in the Philippines per Certification dated December 23, 2008 issued by the Securities and Exchange Commission; and that, on the other hand, ALPHIL is a corporation duly organized and existing under the laws of the Philippines, with office address at Lot 37 DBP Avenue, FTI Complex, Taguig, Metro Manila, Philippines. It is further represented that on January 1, 2009 ALSA and ALPHIL entered into three (3) agreements. The first is a Trademarks and Trade Name License Agreement ("Agreement A"), which grants ALPHIL a non-exclusive license to use the Licensed Marks and Trade Name in the Philippines in connection with Licensed Products manufactured or assembled by or for ALPHIL , and/or Licensed Services rendered by ALPHIL . In consideration of the rights and license granted under Agreement A, ALPHIL shall pay ALSA a royalty of 0.3% of the Net Sales, payable on the last day of July and January each year based on the Net Sales during the preceding calendar half year ending June 30, and December 31, respectively, with the first payment due on July 31, 2009. Agreement A shall commence on January 1, 2009 and shall continue for an initial period of three (3) years. HSaEAD The second agreement is a Technology License Agreement ("Agreement B"), which grants ALPHIL a license of the Technology for manufacture, use and sale within the Field of Agreement B in the Philippines. In consideration of the rights and license granted under Agreement B, ALPHIL shall pay ALSA a royalty of 3% of the Net Sales, payable on the last day of July and January each year based on the Net Sales during the preceding calendar half year ending June 30, and December 31, respectively, with the first payment due on July 31, 2009. Agreement B shall commence on January 1, 2009 and shall continue for an initial period of five (5) years. The final agreement is an Assistance Agreement ("Agreement C"), which grants ALPHIL all the necessary and available assistance provided within the Field of Agreement C, which includes providing ALPHIL any and all relevant information and documents relating to the assistance rendered on the use of the Technology, as well as, providing training to ALPHIL's representatives, which it may send to ALSA's premises for a reasonable period of time, at ALPHIL's expense. In consideration of the rights granted under the Agreement C, ALPHIL shall pay ALSA a royalty of 0.9% of the Net Sales, payable on the last day of July and January each year based on the Net Sales during the preceding calendar half year ending June 30, and December 31, respectively, with the first payment due on July 31, 2009. Agreement C shall commence on January 1, 2009 and shall continue for an initial period of five (5) years. Pursuant to Agreement C, ALSA will not send any of its employees, officers or personnel to perform services in the Philippines. It is finally represented that subjects of the above request for ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, applies in general to royalties derived in the Philippines by a non-resident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., royalties, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). THIcCA xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In this particular case, the treaty involved is the Philippines-France tax treaty which, in its Article 12, provides as follows: "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 beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 15 percent of the gross amount of the royalties. 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 and works recorded for broadcasting or television, 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. xxx xxx xxx" Based on the foregoing provisions, royalties arising in the Philippines and paid to a resident of France may be taxed in the Philippines, but the tax so charged shall not exceed 15 percent of the gross amount of the royalties if the recipient is the beneficial owner thereof. cIADaC Such being the case, considering that ALSA is the beneficial owner of the royalties and is a resident of France, this Office is of the opinion and so holds that the royalty payments of ALPHIL to ALSA under the subject Agreements are subject to a final withholding tax at the rate of 15 percent pursuant to Article 12 (2) of the Philippines-France tax treaty. (BIR Ruling No. ITAD 123-00 dated September 1, 2000; BIR Ruling No. ITAD 092-02 dated May 16, 2002; BIR Ruling No. ITAD 108-01 dated October 30, 2001; BIR Ruling No. ITAD 180-00 dated August 9, 2000) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different having a different tax treatment, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue