ITAD Ruling No. 007-04

February 9, 2004 ITAD RULING NO. 007-04 RP-Switzerland tax treaty Articles 12 BIR Ruling No. DA-ITAD-73-03 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Alexander B. Cabrera Partner, Tax Services Gentlemen : This refers to your application for relief from double taxation dated November 5, 2003, on behalf of your client, Philip Morris Philippines Manufacturing, Inc.(PMPMI), requesting confirmation of your opinion that the royalty payments made by PMPMI to Philip Morris Products SA (PMPSA) are subject to preferential tax rate of 15% pursuant to Article 12(2) of the Philippines-Switzerland tax treaty. It is represented that PMPSA is a nonresident foreign corporation organized and existing under the laws of Switzerland with business address at Quai, Jeanrenaud 3, 2000 Neuchatel, Switzerland; that it is not registered either as a corporation or as a partnership in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated September 4, 2003; that PMPMI is a domestic corporation duly organized and existing under the laws of the Philippines, with principal office at 27th Floor The Enterprise Center, Ayala Avenue, Makati City; that PMPSA and PMPMI entered into a License Agreement effective January 1, 2003, whereby the former granted the latter a non-exclusive right to use the trademarks of PMPSA for the manufacture of cigarettes in the Philippines; that the said agreement complied with the provisions of Sections 87 and 88 of the Intellectual Property Code (RA 8293) on Voluntary licensing per Certificate of Compliance No. 5-2003-00085 dated August 13, 2003; and that in consideration of rights to use the trademarks covered by the agreement, PMPSA shall be entitled to receive royalty payments based on certain percentages of the Net Sales Value of the various Philip Morris products listed in Schedule A of the said agreement. In reply, please be informed that Article 12 of the Philippines-Switzerland tax treaty 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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15 per cent 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 films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. "xxx xxx xxx" Based on the aforequoted provisions, a resident of Switzerland may be taxed in the Philippines on the royalties derived from sources within the Philippines at a rate not exceeding 15 percent of the gross amount of the royalties. AHaETS In view thereof, your opinion that the royalties paid by PMPMI to PMPSA are subject to a preferential tax rate of 15 percent of the gross amount of royalties is hereby confirmed. (BIR Ruling No. DA-ITAD-73-03 dated May 27, 2003) Moreover, the royalty payments by PMPMI for the License Agreement provided by PMPSA are subject to the 10% value-added tax pursuant to Section 108 of the Tax Code of 1997. Accordingly, PMPMI, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT before making any payment to PMPSA. In remitting the VAT withheld, PMPMI 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 sufficient basis for the claim of input to be applied against the output tax that may be due from PMPMI, if it is a VAT-registered taxpayer. In case PMPMI is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as "expense" or "asset" whichever is applicable. In addition, PMPMI is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of PMPSA, the first three copies thereof to be given to PMPSA and the fourth copy to be retained by PMPMI as its file copy. [ Section 4 & 6, Revenue Regulations No. (RR) 4-2002, Section 3 of RR 8-2002; Section 7 of RR 14-2002 ] This ruling is issued on the basis of the facts as represented. 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