ITAD Ruling No. 035-01

March 21, 2001 ITAD RULING NO. 035-01 RP-US, Article 13 RP-Netherland, Article 12 BIR Ruling No. 129-98 Joaquin Cunanan & Company 14th Floor Multinational Bancorporation 6805 Ayala Avenue 1226 Makati City Attention: Ms . Mary Assumption Bautista-Villareal Principal Tax Services Department Gentlemen : This refers to your tax treaty relief application dated February 29, 2000, requesting confirmation of your opinion that royalty payments of Asia Brewery, Inc. (ASIA) to your client Anheuser-Busch Company, Inc. (ABI), are subject to the preferential tax rate of 15% pursuant to the "most favored nation" (MFN) clause of the Philippines-United States Tax Treaty (RP-US Tax Treaty) in relation to the Philippines-Netherlands Tax Treaty and that said payments are considered deductible business expenses under Section 29(a)( 1 ) of the 1997 Tax Code. It is represented that ABI is a corporation organized and existing under the laws of Delaware, United States of America with principal office at One Busch Place, St. Louis, MO 63118 USA; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated April 5, 2000; that it is engaged in the business of brewing, packaging, selling, distributing and advertising Budweiser; that it has developed certain trade secrets and know-how in brewing and packaging Budweiser for distribution; that ASIA is a corporation organized and existing under the laws of the Philippines with principal place of business in Cabuyao, Laguna; that ABI and ASIA entered into a Joint Marketing and Local Brewing Agreement dated June 19, 1996; that ABI granted ASIA the exclusive, non-transferable right and license under patent, trademark, and copyright laws to produce and package Budweiser, and to use the trademark and other copyrighted materials of ABI in connection with the labeling, packaging, marketing, advertising and promoting Budweiser beer in the Philippines; and that ASIA agreed to pay ABI a royalty payment equivalent to five (5%) percent of the net sales of Budweiser beer in the territory. In reply, please be informed that Article 13 of the RP-US Tax Treaty provides, viz : "ARTICLE 13 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 per cent 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 Investments and engaged in preferred areas of activities, and 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 . (Emphasis supplied) 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, trademark, 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. xxx xxx xxx" The payments for the license granted by ABI to ASIA involving the right to produce and package Budweiser and to use ABI's trademark and other copyrighted materials constitute royalties. Such being the case, and in view of the "most favored nation" clause found in the RP-US Tax Treaty, royalty payments made by ASIA to ABI shall be subject to 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. In pursuance of the MFN clause under Article 13(2)(b)(iii) of the RP-US Tax Treaty, Article 12 of the RP-Netherlands Tax Treaty in turn provides: "Article 12 1. Royalties arising in one of the 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 the State, but 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, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. SDAcaT xxx xxx xxx" Based on the foregoing provisions, it appearing that the lowest rate of the Philippine tax that may be imposed on royalties of similar nature arising from the Philippines is 15% per cent of the gross amount of the royalties provided under Article 12 (2)(b) of the RP-Netherlands Tax Treaty, the same shall be applied in this case thereby confirming your opinion that the payment of royalties by ASIA to ABI is subject to a fifteen percent (15%) tax rate. Furthermore, the royalty payments to be remitted by ASIA shall be subject to the 10% value-added tax pursuant to Section 108 of the Tax Code of 1997 as implemented by Section 4.102-1 (b) of Revenue Regulations No. 7-95 which 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 using BIR Form 1600 (Monthly Remittance Return of VAT and other Percentage Taxes Withheld). The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." Accordingly, ASIA shall, before making payment of royalties to ABI, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return using BIR Form No. 1600 for and on behalf of ABI. The duly validated VAT declaration/return is sufficient evidence for ASIA in claiming input tax credit. [(Section 4.110-3(b) of the Revenue Regulation No. 7-95) (BIR Ruling No. 129-98)] This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said 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