ITAD Ruling No. 048-05

May 31, 2005 ITAD RULING NO. 048-05 Article 12, Philippines-Australia tax treaty BIR Ruling No. DA-ITAD 40-02 BIR Ruling No. DA-ITAD 90-03 BIR Ruling No. DA-ITAD 154-04 Wordtext Systems, Inc. 7/F SEDCCO 1 Bldg. Legaspi cor. Rada Sts. Legaspi Village, Makati City Attention: Remedios L. Chua Vice President, Finance Gentlemen : This refers to your application for relief from double taxation dated September 22, 2004, requesting confirmation that your royalty payments to Citrix Systems Asia Pacific Pty Ltd. (Citrix Systems) for purchase of computer software are subject to the preferential tax rate of 25% pursuant to the Philippines-Australia tax treaty. It is represented that Citrix Systems is a nonresident foreign corporation organized and existing under the laws of Australia with principal office at Level 3, 1 Julius Avenue, North Ryde NSW, 2113, Australia; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 21, 2004; that Citrix Systems manufactures, produces and/or supplies micro computer products (Products) 1 ;that Wordtext Systems, Inc. (Wordtext) is a corporation duly organized and existing under the laws of the Philippines with principal office address at 7/F SEDCCO 1 Bldg.,Legaspi cor. Rada Sts.,Legaspi Village, Makati City, Philippines; that on October 10, 2002, Citrix Systems and Wordtext entered into a Distributor Agreement (Agreement) whereby the former desires to grant Wordtext as distributor the right to distribute the Products upon the terms and conditions as set forth in the said Agreement; that under the Agreement, Citrix Systems grants Wordtext a non-exclusive, non-transferable license to demonstrate and support Products and to distribute the Products to resellers in the Philippines; that the Agreement constitutes an offer to supply the Products to Wordtext which may be accepted by Wordtext, from time to time during the term of the Agreement, by submitting written purchase orders that conform with the terms and conditions hereof; that each conforming purchase order submitted to Citrix Systems by Wordtext will be deemed an acceptance by Wordtext of Citrix Systems' offer to supply the number of Products specified in such purchase order pursuant to the terms and conditions of the Agreement; that Wordtext shall pay for all orders through wire transfer within thirty (30) days from date of invoice or pre-approved terms advised by Citrix Systems from time to time; that Citrix Systems shall have no obligation to deliver any products until it receives the wire transfer from Wordtext and all amounts due Citrix Systems hereunder shall be calculated and paid in U.S. dollars; that for purposes of the Citrix Systems' current requirements for training, installation and support, Wordtext provides at least two (2) of its qualified employees to attend Citrix Systems training program in the use and operation of the Product at its expense as set forth in Exhibit D and that Citrix Systems shall have the right at any time upon notice to Wordtext to change and amend any of the provisions thereof; that this Agreement shall continue for 2 years from the Effective Date unless terminated earlier by either party giving not less than thirty (30) days written notice; and that during the term of this Agreement, Wordtext shall have the right to advertise Citrix Systems' Products under the trademarks, marks, and trade names that Citrix Systems may adopt from time to time and that nothing in the Agreement shall grant to Distributor any right, title or interest in the trademarks. In reply, please be informed that Article 12 of the Philippines-Australia tax treaty provides, viz: "Article 12 "ROYALTIES "1. Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, 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 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; and b) in all other cases, 25 per cent of the gross amount of the royalties. taxcd2005 "3. The term "royalties" in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for a) the use of, or right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right ;(Underscoring supplied) b) the use of, or the right to use, any individual, commercial or scientific equipment; c) the supply of scientific, technical, industrial or commercial knowledge or information; d) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a),any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); e) the use of, or the right to use (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; or f) total or partial forbearance in respect of the use of a property or right referred to in this paragraph. "xxx xxx xxx" Based on the abovecited provisions, paragraph 3 thereof, the fees to be paid by Wordtext to Citrix Systems are payments for the use or the right to use of a copyright of literary, artistic or scientific work and as such are considered as falling within the definition of the term royalties. Moreover, royalties arising in the Philippines and paid to a resident of Australia may be subject to Philippine income tax at a rate not to exceed fifteen percent (15%) of the gross amount of the royalties where such royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities, or twenty five percent (25%) of the gross amount of the royalties in all other cases, where the recipient is beneficially entitled to the royalties. Since Wordtext is not an enterprise registered with the Philippine Board of Investments engaged in preferred areas of activities, this Office is of the opinion and so holds that the royalty payments are subject to the preferential tax rate of twenty-five percent (25%) based on the gross amount thereof pursuant to Article 12(2)(b) of the Philippines-Australia tax treaty. (BIR Ruling No. DA-ITAD 90-03 dated February 20, 2004; BIR Ruling No. DA-ITAD 154-04 dated December 20, 2004; BIR Ruling No. 40-02 dated April 02, 2002) EAIcCS Moreover, the royalty payments made by Wordtext to Citrix Systems under the Agreement are subject to the 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, Wordtext, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT before making any payment to Citrix Systems. In remitting the VAT withheld, Wordtext shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Wordtext upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Wordtext 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 an "expense" or "asset" whichever is applicable. In addition, Wordtext is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of Citrix Systems, the first three copies thereof to be given to Citrix Systems and the fourth copy to be retained by Wordtext as its file copy. [Section 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] This ruling is issued based on 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. . "Product(s)" means Citrix microcomputer software products as defined in Exhibit A, attached hereto, solely in object code format, including End-User manuals and other documentation ordinarily distributed by Citrix with such software and including any software delivered by Citrix to Distributor hereunder. Citrix shall have the right at any time, upon notice to Distributor, to add or remove products from the list in Exhibit A.