ITAD Ruling No. 054-00

March 7, 2000 ITAD RULING NO. 054-00 Art. 13, RP-US Art. 12, RP-Netherlands 129-98 Quisumbing Torres Law Firm 11TH Floor, Pacific Star Building Makati Ave. Cor. Sen. Gil J. Puyat Ave. 1200 Makati City Attention: Atty . Shennan A . Sy Gentlemen : This refers to your application for tax treaty relief dated October 29, 1999 on behalf of your client, Dekalb Genetics Corporation (Dekalb), to avail of the 15% final withholding tax on royalties pursuant to RP-US Tax Treaty. It is represented that Dekalb is a non-resident foreign corporation organized and existing under the laws of the State of Delaware, U.S.A.; that Ayala Seeds Corporation (ASC) is a domestic corporation organized and existing under Philippine laws; that Dekalb is primarily engaged in the business of researching, developing, testing, producing, conditioning and marketing hybrid corn seeds; that on December 30, 1998, Dekalb entered into a License, Production and Distribution Agreement (LPDA) with ASC whereby Dekalb granted ASC a non-transferable license and right to the use of parental corn seeds, the right to purchase from Dekalb hybrid corn seeds and to obtain from Dekalb technical know-how and information and assistance relating to behavior, characteristics, developments and potential of the foundation and commercial seeds; that in consideration for all the grants, licenses, production and sales right and technical assistance provided under the LPDA, ASC will pay royalties to Dekalb amounting to 20% of the Net Sales Revenue of commercial seeds for each license variety and 11.25% of the Net Sales Revenue of commercial seeds for certain variety. In reply, please be informed that under the most favored nation provision of the RP-US Tax Treaty [Art. 13, paragraph (2)(b)(iii)], the tax imposable on royalties derived by a resident of the United States from 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. Corollarily, Article 12(b) of the RP-Netherlands Tax Treaty provides that royalties arising in the Philippines and paid to a resident of Netherlands may be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties in cases other than royalties paid by an enterprise registered in preferred areas of activities in the Philippines. Such being the case and since ASC is not registered and engaged in preferred areas of activities in the Philippines, royalties arising in the Philippines and payable to Dekalb are subject to Philippine tax at the rate of 15% pursuant to Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(b) of the RP-Netherlands Tax Treaty. (BIR Ruling 129-98) LibLex Moreover the said royalties based on the net sales shall be subject to 10% value-added tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code and that ASC shall, before making payment of royalties to Dekalb, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return for and in behalf of Dekalb. The duly validated VAT declaration/return is sufficient evidence for ASC in claiming input tax credit.(Section 4.110-3(b) of Revenue Regulation No. 7-95) This ruling is being issued on the basis of the foregoing representation. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group