ITAD Ruling No. 032-03

February 13, 2003 ITAD RULING NO. 032-03 Articles 10 & 12, RP-Spain Secs. 108 & 109, NIRC BIR Ruling No. DA-ITAD-146-02 BIR Ruling No. DA-ITAD-162-02 Perfumeria Espaola Corporation Chemphil Building 851 A. Arnaiz Ave., Legaspi Village, Makati City Attention: Astrea C. Ocampo General Manager This refers to your letter dated November 19, 2002, requesting for preferential tax rates on the royalty and dividend remittances made by your company, PERFUMERIA ESPAOLA CORPORATION (PEC) to PERFUMERIA GAL S.A. (GAL), pursuant to the Philippines-Spain tax treaty. SCaEcD It is represented that GAL is a corporation organized and existing under the laws of Spain with office address at No. 28 Avenida de Madrid, 28802 Alcala de Henares, Madrid, Spain; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 21, 2002; that it is engaged in the manufacture and sale of toilet articles, cosmetics, eau de cologne and toilet soaps in Spain and other countries, distinguished by and sold under various trademarks such as "Heno de Pravia" and other trademarks owned by GAL; that PEC is a corporation organized and existing under and by virtue of Philippine laws; that a License Agreement was entered into by and between GAL and PEC effective June 1, 1993 until June 1, 2003 per addendum to License Agreement dated March 27, 1998, whereby GAL grants to PEC an indivisible, non-transferable and exclusive license for the use of the Trademarks of GAL, and to transfer to PEC technology and know-how including help in servicing materials and personnel training; that in consideration, PEC shall pay to GAL a royalty fee equivalent to three percent (3%) of the Company's net sales of all Products licensed by GAL as indicated in the License Agreement; that GAL holds nine million five hundred sixty-two thousand and five hundred (9,562,500) shares or Fifty-one per cent (51%) of the eighteen million seven hundred fifty thousand (18,750,000) total outstanding shares of PEC; that in a meeting held by the Board of Directors of PEC on October 2, 2002, a resolution to declare cash dividend was passed and approved in the sum of Four Million Pesos (P4,000,000.00) out of the unrestricted retained earnings of the corporation as of December 31, 2001, payable to stockholders of record as of October 2, 2002 on or before December 15, 2002. In reply, please be informed of the pertinent provisions of the RP-Spain tax treaty, viz : 1. On Royalties " 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. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State. However, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; (b) 20 per cent in respect of cinematographic films or tapes for television or broadcasting; and (c) 15 per cent of the gross amount of the royalties in all other cases. "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 works, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television. xxx xxx xxx" Based on the above provisions, royalties which arise in the Philippines and paid to a resident of Spain may be taxed in the Philippines at a preferential rate of ten per cent (10%) if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred areas of activities, twenty per cent (20%) if the payments are in respect of cinematographic films or tapes for television or broadcasting, and in all other cases, fifteen per cent (15%) of the gross amount of royalties. (DA-ITAD-162-02 dated September 17, 2002) Such being the case, since PEC is not a BOI-registered enterprise, and the payments made by PEC to GAL are not in respect of cinematographic films or tapes for television or broadcasting, this Office is of the opinion and so holds that the herein payments are subject to tax at 15% of the gross amount of royalties, pursuant to Article 12(2)(c) of the RP-Spain tax treaty. However, the fees to be paid by PEC to GAL in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, PEC, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such fees before any payment to GAL. In remitting the VAT withheld, PEC 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 PEC upon filing its own VAT, if it is a VAT-registered-taxpayer. In case PEC 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, PEC is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of GAL, the first three copies thereof to be given to GAL and the fourth copy to be retained by PEC 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] 2. On Dividends " Article 10 " DIVIDENDS "1. Dividends paid by a corporation which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. "2. However, such dividends may be taxed in the Contracting State of which the corporation paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the recipient is a corporation (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; (b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. "3. The term 'dividends' as used in this Article means income from shares 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the above, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Spain at a rate not exceeding 10% if the last-mentioned company holds directly at least 10% of the voting shares of the company paying the dividends. (DA-ITAD-146-02 dated August 22, 2002) Considering that GAL holds 51% of the outstanding capital stock of PEC, this Office is of the opinion and so holds that the dividend remittances of PEC to GAL is subject to a preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10(2)(b) of the RP-Spain tax treaty. This ruling is issued on the basis of the fact 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