ITAD Ruling No. 024-00

January 28, 2000 ITAD RULING NO. 024-00 RP-Singapore Art. 12 (2) (C); (4); and (5); Art. 7 (1) L; 131-97; 079-91; 002-90; 075-88 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Ave., 1226 Makati City Attention: Ms . Mary Assumption S . Bautista Principal, Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated June 8, 1999, on behalf of Jardine Lloyd Thompson Asia Pte., Ltd. (JLTA) of Singapore, requesting for confirmation if the annual license fees paid by Jardine Aboitiz Insurance Brokers (JAIB) to JLTA are subject to the preferential tax rate of 25%. LexLib It is represented that JLTA is a limited liability corporation duly organized and existing under the laws of Singapore; that it is neither registered as a corporation nor as a partnership in the Philippines as per Securities and Exchange Commission's certification dated June 28, 1999; that it entered into a Master Software License Agreement with JAIB, a corporation organized and existing under Philippine laws and is primarily engaged in the insurance brokerage business. Under such agreement JLTA has granted personal, non-transferable, non-assignable and non-exclusive license to use for its own administrative purposes only in the Philippines. For the rights granted to JAIB, JLTA shall be paid as license fees for the use of the licensed software which should be due and payable within 30 days after the date of the invoice from JLTA. The first scheduled software was the Broker On-Line Support System (BOSS SYSTEM) which covers indefinite period subject to either party. the annual license fee payable to JLTA for the use of BOSS SYSTEM is US $36,000.00. In reply, please be informed that Article 12 (2)(c); (4); and (5) of the RP-Singapore tax treaty 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 law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charge shall not exceed: a) . . . b) . . . c) in all other cases, 25 per cent of the gross amount of the royalties. 3. . . . 4. The provisions of paragraph 1 and 2 of this Article shall not apply if the recipient of the royalties, being a resident of a Contracting State, carries on 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 Article 7 or Article 14 of this Agreement, as the case may be, shall apply. 5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority, statutory 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 in connection with which the contract under which the royalties are paid was concluded, and such royalties are borne by such permanent establishment, then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment is situated. Article 7 (Business Profits) 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." Accordingly, this Office hereby confirms that the annual license fees paid by JAIB to JLTA are subject to the preferential tax rate of 25% and that it should also be subject to 10% VAT where JAIB shall be responsible to withhold from JLTA 10% VAT and remit to BIR on behalf of JLTA. A duly validated VAT declaration/return shall be sufficient evidence for JAIB to use the input tax as credit against its output VAT liability. Further, royalty payment to a Singapore Licensor which JLTA shall be subject to income tax and consequently to withholding tax at 25% preferential tax rate. 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 considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue