ITAD Ruling No. 038-04

April 28, 2004 ITAD RULING NO. 038-04 Article 12, RP-Denmark tax treaty BIR Ruling No. 8-00 BIR Ruling No. 14-04 Atty. Nestor P. Nuez & Associates 8/F, CIF Towers, J. Luna Ave., cor R. Humabon Ave. North Reclamation Area, Cebu City Attention: Atty. Nestor P. Nuez Gentlemen : This refers to your application for relief from double taxation dated March 12, 2004, on behalf of your client CP Kelco Philippines Inc. (CP Kelco-Phil) requesting confirmation that the royalty payments made by CP Kelco-Phil to CP Kelco ApS (CP Kelco-Denmark) is subject only to a 15% final withholding tax, pursuant to the Philippines-Denmark tax treaty. It is represented that CP Kelco-Denmark is a non-resident foreign corporation organized and existing under the laws of the Kingdom of Denmark with principal office at Ved Banen 16, DK-4623, Lille Skensved, Denmark; that it is not engaged in trade or business in the Philippines as per certification issued by the Securities and Exchange Commission dated December 17, 2003; that CP Kelco-Phil is a corporation duly organized and existing under the laws of the Philippines with principal office at Barangay Abugon, Sibonga, Cebu; that on December 26, 2003, both CP Kelco-Phil and CP Kelco-Denmark entered and executed a License and Technical Assistance Agreement, whereby CP Kelco-Phil agreed to pay royalties to CP Kelco-Denmark for the former's use of the licensed technology and technical assistance in the manufacture of carrageenan products; that in consideration of the license granted and assistance to be rendered by CP Kelco-Denmark, CP Kelco-Phil shall pay a royalty fee of five percent (5%) of the "invoice price" of all products produced and sold by it, provided that the Philippine taxes on all payments relating to their Agreement shall be borne by CP Kelco-Denmark; that the said License and Technical Agreement will take effect on January 1, 2004, and shall continue to be enforced for a period of five (5) years; and thereafter the Agreement shall be automatically renewed for two (2) additional five (5) year periods and may be terminated at any time upon the mutual agreement of both parties. In reply, please be informed that Article 12 of the Philippines-Denmark tax treaty provides as follows: "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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this limitation. "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 and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, and for the use of, or the right to use, industrial, commercial or scientific equipment in connection therewith. "xxx xxx xxx" Considering that the recipient, CP Kelco-Denmark is the beneficial owner of royalties arising in the Philippines, the royalty fees paid by CP Kelco-Phil to CP Kelco-Denmark, consisting of 5% of the invoice price under the License and Technical Assistance Agreement, are subject to Philippine tax at the rate of 15% of the gross amount of the royalties. Finally, Section 108(A)(1) of the Tax Code states that " the lease or the use of the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right " falls within the definition of sale or exchange of services subject to 10 percent value-added tax (VAT). Accordingly, the license fees paid by CP Kelco-Phil shall be subject to 10 percent VAT. ( BIR Ruling No. ITAD 14-04 dated February 20, 2004 ) Under Section 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-02, and Section 7 of Revenue Regulations No. 14-2002, the CP Kelco-Phil being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10 percent VAT on such license fees before paying them to CP Kelco-Denmark. In remitting the VAT withheld, the CP Kelco-Phil shall use BIR Form 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If the CP Kelco-Phil is a VAT-registered taxpayer, the duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input VAT by the CP Kelco-Phil upon filing its own VAT. If not a VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as an " expense " or " asset " on the part of the CP Kelco-Phil, whichever is applicable. In addition, the CP Kelco-Phil is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of CP Kelco-Denmark, the first three copies to be kept by the CP Kelco-Denmark and the fourth copy by CP Kelco-Phil for its files. This ruling is issued on the basis of the facts 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. ESacHC Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service