ITAD Ruling No. 003-03

January 15, 2003 ITAD RULING NO. 003-03 Art. 12 & 15 of RP-Netherlands Secs. 25 (A) & 108 (A) (3) NIRC of 1997 BIR Ruling No. ITAD 141-00 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B . Cabrera Partner, Tax Services Gentlemen : This refers to your application for relief from double taxation dated July 1, 2002, requesting confirmation that the fees to be paid by Philippine Bank of Communications (PBCom) to Silverlake Netherlands B.V. (Silverlake) under a licensing agreement are royalties subject to the 10% VAT and the preferential tax rate of 15% pursuant to the RP-Netherlands tax treaty. It is represented that Silverlake is a corporation organized and existing under the laws of The Netherlands with principal office at Officia I, De Boelelaan 7, 1083 HJ Amsterdam, 1008 DE Amsterdam. The Netherlands; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by certificate issued by the Securities and Exchange Commission dated April 23, 2002; that PBCom is a corporation organized and existing under the laws of the Philippines with principal office at 5th Floor, PBCom Tower, 6795 Ayala Avenue, Makati City, Philippines; that on August 8, 2001, PBCom entered into a Software Licensing Agreement with Silverlake; that under said Agreement, Silverlake grants PBCom a non-exclusive, non-transferable, perpetual license to use the Product in the Philippines; that the Product refers to the Banking Software Package (Software Package) stated in Schedule A of the Agreement together with manuals, specifications or other documentation in any printed, machine readable or other form including but not limited to listings, manuals and magnetic media to be furnished under the Agreement; that the Software Package specifically consists of the following: 1. Silverlake Integrated Banking System (SIBS) modules which include: a. Customer information file; b. Deposits (CASA, Time Deposits); c. General ledger; d. Local remittance; and e. Delivery services processor 2. Branch Tellering System with Signature Verification 3. Interface to the existing GL System 4. Interface to the existing ATM System; that, in consideration for the Product provided by Silverlake, PBCom agrees to pay Silverlake the total amount of US$157,500 for the first 125 branches which shall be exclusive of value-added tax (VAT) and an additional license fee of US$2,500 (exclusive of VAT) for each additional branch. In reply, please be informed that Article 12 of the RP-Netherlands tax treaty provides, viz: "Article 12 "Royalties 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the 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: (a) 10 percent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and (b) 15 percent of the gross amount of the royalties in all other cases. xxx xxx xxx 3. . . . 4. 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 tapes for radio or television broadcasting, any patent, trademark, 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 above, royalties arising in the Philippines and paid to a resident of The Netherlands may be subject to the Philippine income tax at a rate not to exceed 10 percent of the gross amount of the royalties where such are paid by an enterprise registered and engaged in preferred areas of activities or 15 percent of the gross amount of the royalties in all other cases, where the recipient is the beneficial owner of the royalties. The license fees to be paid by PBCom to Silverlake are considered "payments of any kind received as a consideration for the use of, or the right to use information concerning industrial, commercial or scientific experience" and as such are royalties within the meaning of the aforequoted Article. Therefore, this office is of the opinion and so holds that the subject license fees are subject to the preferential tax rate of 15 percent of the gross amount of royalties pursuant to the RP-Netherlands tax treaty. ( BIR Ruling No. 141-00 dated September 19, 2000 ) However, the royalty payments by PBCom for that Product provided by Silverlake in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, PBCom, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT before any payment to Silverlake. In remitting the VAT withheld, PBCom shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added tax and Other percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by PBCom upon filing its own VAT, if it is a VAT-registered taxpayer. In case PBCom is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition PBCom is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of Silverlake, the first three copies thereof to be given to Silverlake and the fourth copy to be retained by PBCom as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 14-2002] TaSEHD In view of all the foregoing, PBCom shall be responsible for the withholding of the 10% VAT and income tax at the rate of 15% of the gross amount of royalties. This ruling is issued based on 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service