ITAD Ruling No. 066-02

April 24, 2002 ITAD RULING NO. 066-02 Article 12, RP-Austria BIR Ruling No. ITAD-104-00 BIR Ruling No. 129-98 Castillo & Poblador Law Offices 5th Floor Montipino Bldg. 138 Amorsolo St., Legaspi Village Makati City Attention: Mr. Napoleon J. Poblador Gentlemen : This refers to your tax treaty relief application dated February 21, 2001, requesting confirmation that the royalty payment of Waagner Biro Philippines, Inc. (WBPI) to Waagner Biro Bruckenbau AG (WB BB AG) is subject to the preferential tax rate under Article 12 of the RP-Austria tax treaty. It is represented that WB BB AG is a non-resident foreign corporation duly organized and existing under the laws of Austria with principal office at Stadlauer Strabe 54-56, 1221 Vienna, Austria; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated July 11, 2001; that it entered into a "License Agreement" with WBPI, a corporation duly organized and existing under the laws of the Philippines with office address at 19/F Unit 19-A Trafalgar Plaza Building, 105 H. V. dela Costa St., Salcedo Village, Makati City; that under the agreement, WB BB AG grants WBPI a non-transferable and non-exclusive right to use the trade name "WAAGNER-BIRO" as part of the company's name as well as in the course of the company's business; that the agreement shall commence on January 4, 2001 and shall be valid for an unlimited period unless terminated by WB BB AG; that as a remuneration for the right to use the trade name "WAAGNER-BIRO", WBPI will pay WB BB AG a license fee of 2.5% of the actual turnover of the WBPI for the respective year, the monthly invoices in the amount of one twelfth of 2.5% (say two point five percent) of the planned turnover will be issued and they will be due and payable at the beginning of every month, and after year end the final yearly license fee will be assessed based on the actual turnover and a credit or debit note will be issued; and that the License Agreement is duly registered with the Intellectual Property Office of the Department of Trade and Industry under Certificate of Compliance No. 5-2001-00031 dated July 6, 2001: In reply, please be informed that Article 13 of the RP-Austria tax treaty provides, viz : "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 Contracting State. "2. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of the Contracting 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. cHCaIE "3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines registered with the Board of Investments and engaged in preferred pioneer areas of investments under the investment incentives laws of the Philippines to a resident of Austria, who is the beneficial owner of the royalties, shall not exceed 10 per cent of the gross amount of the royalties. "4. The term "royalties" as used in this Article means the 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 cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial; commercial or scientific experience. Based on the above, since WB BB AG is not a BOI-registered enterprise, the subject payments are classified as royalty payments under Article 12(2) of the RP-Austria tax treaty. Thus, the royalty payments of WBPI to WB BB AG shall be subject to the preferential tax rate of fifteen per cent (15%) based on the gross amount of royalties. ( BIR Ruling No. ITAD-104-00 ) Moreover, the royalty payments to be remitted by WBPI 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, WBPI shall, before making payment of royalties to WB BB AG, withhold and remit to this Bureau the said 10% VAT due thereon by filing a separate VAT return using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for and on behalf of WB BB AG. The duly validated VAT declaration/return is sufficient evidence for WBPI 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 being issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service