ITAD Ruling No. 025-99

September 15, 1999 ITAD RULING NO. 025-99 NIRC-Sec. 108 RP-UK-Art. 11 000-00 Bush Boake Allen Philippines, Inc. 10-B Reliance cor. Brixton Streets, 1600 Pasig City Attention: Ms . Nelia G . Corpuz Finance Manager Gentlemen : This refers to your application for relief from double taxation dated October 7, 1998, in behalf of Bush Boake Allen, Inc. (BBA), requesting for a preferential tax rate of fifteen percent (15%) to be withheld on royalty remittances by Bush Boake Allen Philippines, Inc. (BBAP) pursuant to the RP-UK Tax Treaty. Documents submitted to this Office show that BBA is a non-resident foreign corporation duly organized and existing under the laws of England, with no permanent establishment here; that BBA entered into a Support Services Agreement with BBAP, a domestic corporation duly organized and existing under Philippine laws, engaged in the manufacture of compound flavourings, fragrances, essences, seasonings, spice products and other product lines; that on February 4, 1999, a Support Services Agreement was entered into by and between BBAP and BBA whereby the latter shall provide the former support services such as market research and information and methodology in flavor, fragrances and aroma chemical; that such agreement was duly registered with the Intellectual Property Office; and that in consideration thereof, BBAP shall pay BBA a monthly fee for the support services provided by the latter to the former. In reply, please be informed that Article 11 of the RP-UK Tax Treaty provides, as follows: "Article 11 Royalties (1) Royalties arising in a Contracting State which are derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State. (2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall not exceed: (a) 15% of the gross amount of the royalties, where the royalties are paid: (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activity, or prcd (ii) . . . (b) in all other cases, 25 per cent of the gross amount of the royalties. (3) The term royalties as used in this Article means payment 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 cinematograph films, and 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. It is observed, however, that BBAP is not a Board of Investments (BOI) registered enterprise engaged in preferred areas of activity. The BOI certification submitted certifies only that BBAP is authorized to accept the additional permissible investment of its foreign investor, A. Boake Roberts & Co. (Holdings) Ltd. Such being the case, your application for a preferential tax rate of fifteen percent (15%) to be applied on your royalty remittances to BBA is hereby denied for lack of legal basis. However, pursuant to paragraph 2 (b), Article 11 of the aforesaid tax treaty, the royalty under consideration is subject to a final tax rate of twenty five percent (25%) which shall be withheld before actual remittance of said royalty. cdll Accordingly, your company being a withholding agent, is required to pay the under-remitted amount of P745,378.15 representing the difference between the amount of tax withheld and the approved rate of twenty five percent (25%). Such amount is subject to surcharge, interest and compromise penalty adjustment up to the date of full payment. Moreover, under Section 108 of the National Internal Revenue Code of 1997, the royalty payments to be remitted by BBAP is subject to the ten percent (10%) Value-added tax (VAT). Sec. 4.102-1(b) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." This ruling is being 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 null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue