ITAD Ruling No. 040-03

February 28, 2003 ITAD RULING NO. 040-03 RP-US tax treaty RP-Russia tax treaty Section 108 (a) (1), NIRC of 1997 BIR Ruling No. ITAD-10-01 Barrameda Daquigan & Magnaye Law Offices 9F Atherton Place Tomas Morato corner Roces Avenue Quezon City Attention: Leoncio Joel M. Barrameda III Gentlemen : This refers to your application for relief from double taxation dated February 4, 2003, on behalf of your client, CyberStateU.com Philippines, Inc. (Cyberstate), requesting confirmation of your opinion that the royalty payments by Cyberstate to MindLeaders.com, Inc. (MindLeaders) are subject to the preferential tax rate of fifteen percent (15%), pursuant to the most-favored nation clause of the RP-US tax treaty in relation to the pertinent provisions of the RP-Russia tax treaty. IEHTaA It is represented that Cyberstate (formerly named as "DPEC, Inc.") is a corporation organized and existing under the laws of the Philippines with office address at 3rd Floor, Blue Building, 188 E. Rodriguez Avenue, Bagumbayan, Quezon City; that MindLeaders is a corporation duly organized and existing under the laws of the State of Ohio, United States of America, with business address at 851 W. Third Avenue Building, 3 Columbus, Ohio, USA; that MindLeaders is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities and Exchange Commission dated November 25, 2002; that Cyberstate and MindLeaders entered into an International Affinity Channel Partner Agreement, whereby MindLeaders grants to Cyberstate, a non-exclusive non-transferable right to promote, market and permit on-line use of web-based training courses owned and copyrighted by MindLeaders; that in consideration thereof, Cyberstate shall pay MindLeaders "royalties . . . calculated in accordance with Attachment 3 for each Course access, license or other authorized distribution transaction" (paragraph 3 of the Agreement); that the term of the said Agreement commenced on August 16, 2001 and shall continue for an Initial Term of one (1) year, and shall automatically renew thereafter for additional one (1) year periods (Renewal Terms); that the Agreement may be terminated at the end of the Initial Term or any Renewal Term upon thirty (30) days prior written notice or earlier pursuant to the pertinent provisions of the same Agreement; and that the said courses were created to be presented interactively with the Netscape Navigator 4.0 or Microsoft Internet Explorer 4.0 browser software. In reply, please be informed that under the "most favored nation" clause provision of the RP-US tax treaty [Article 13, paragraph (2)(b)(iii)] , the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be 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. Article 12, paragraph 2 of the RP-Russia tax treaty provides that the royalties arising from the Philippines and paid to a resident of Russia may also be taxed in the Philippines but the tax so charged shall not exceed fifteen percent (15%) of the gross amount of royalties. The term "royalties" as used under the said Article 13 includes 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. A perusal of the RP-US and RP-Russia tax treaties, particularly their provisions on the avoidance of double taxation, shows similarity on the manner of payment of taxes, that is, the allowable foreign tax credit on both treaties is the amount actually paid in the Philippines. Such being the case, this Office is of the opinion and so holds that the royalties paid by Cyberstate to MindLeaders are subject to tax at the rate of fifteen percent (15%) pursuant to the "most favored nation" provision of the RP-US tax treaty in relation to the RP-Russia tax treaty. (BIR Ruling No. ITAD-10-01 dated February 12, 2001) However, the said royalty payments by Cyberstate to MindLeaders shall be subject to ten percent (10%) value-added tax (VAT), pursuant to Section 108(A)(1) of the National Internal Revenue Code (Tax Code) of 1997. THaDAE 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 on 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 (Section 4.102-1(b), Revenue Regulations No. 7-95) . Accordingly, Cyberstate shall be responsible for the withholding of income tax at the rate of fifteen percent (15%) of the gross amount of royalties and the VAT at the rate of ten percent (10%) of the contract amount. (BIR Ruling No. DA-ITAD-108-02 dated May 30, 2002) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the parties herein are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service