ITAD Ruling No. 025-01

March 12, 2001 ITAD RULING NO. 025-01 RP-US Article 13 207-82 Hunt-Universal Robina Corp . CFC Building, E. Rodriguez Jr. Avenue Bagong Ilog, Pasig City Attention: Mr . Jorge Q . Concepcion Managing Partner Gentlemen : This refers to your letters dated June 6, 2000 and October 16, 2000, requesting confirmation of your opinion that the royalty fees paid by your company to Hunt-Wesson Foods International (Hunt USA) is subject to the preferential tax rate of 15 percent pursuant to the RP-US Tax Treaty. It is represented that Hunt USA is a non-resident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal address at 1645 West Valencia Drive, Fullerton California, USA; that it is not registered as a corporation/partnership in the Philippines as per certification dated March 7, 2000 issued by the Securities and Exchange Commission; that Hunt-Universal Robina Corp. (Hunt Phil) is a Board Of Investments (BOI) registered corporation duly organized and existing under Philippine laws; that Hunt USA and Hunt Phil entered into an Amendment and Restated Technical Assistance Agreement and Its Amendatory Agreement whereby Hunt USA granted Hunt Phil the sole and exclusive license to manufacture and sell in the Philippines the products listed in the said Agreement in accordance with the formulas and specifications furnished by the former and to affix to these products the trademark "HUNT'S;" that in consideration for such grant, Hunt Phil shall pay Hunt USA a royalty of three percent (3%) of the net wholesale sales in Pesos of all the licensed products sold; and that the said Agreement has been duly registered with the Bureau of Patents, Trademarks and Technology Transfer on April 28, 1997 under Certificate of Registration No. 1954 which is valid for ten years from June 1, 1995 to May 31, 2005. In reply. please be informed that Article 13 of the RP-US Tax Treaty which reads, viz: "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 Investment and engaged in preferred areas of activities, and (emphasis supplied) (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. "(4) The provisions of paragraphs 1 and 2 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 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. xxx xxx xxx Based on the foregoing, royalty payments to a company which is a resident of the United States of America (USA) and which does not have a permanent establishment in the Philippines may be taxed either at 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, at a preferential tax rate not exceeding fifteen per cent (15%) of the gross amount of royalties if the payor Philippine company is a Board of Investments (BOI) registered enterprise, or at a tax rate not exceeding twenty-five per cent (25%) of the gross amount of the royalties in all other cases. DaHSIT Such being the case, since Hunts Phil is a BOI-registered enterprise, the royalty fees paid by Hunt-Universal Robina Corp. (Hunt Phil) to Hunt-Wesson Foods International (Hunt USA) are subject to the preferential tax rate of 15 per cent based on the gross amount of royalties pursuant to the RP-US Tax Treaty. (BIR Ruling No. 207-82 dated June 28, 2000) This ruling is issued on the basis of the foregoing facts as represented. 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group