ITAD Ruling No. 068-00

April 7, 2000 ITAD RULING NO. 068-00 RP-Germany Article 12 Quasha Ancheta Pea and Nolasco Lawyers Don Pablo Building, 114 Amorsolo St. Makati City, Metro Manila Attention: Atty . Linda Joy B . Moya Gentlemen : This refers to your application for relief from double taxation dated January 07, 2000, requesting that your client SUMISOLA CORPORATION (SUMISOLA) be authorized to withhold a preferential tax rate of ten percent (10%) on its royalty payments to ISOLA A. G., pursuant to the RP-Germany Tax Treaty. It is represented that ISOLA A. G. is a non-resident foreign corporation duly organized and existing under the laws of Germany; that it is not registered as a corporation / partnership in the Philippines as per certification dated October 27, 1999 issued by the Securities and Exchange Commission (SEC); that SUMISOLA, on the other hand, is a Philippine Economic Zone Authority (PEZA) registered domestic corporation duly organized and existing under the laws of the Philippines; that on April 06, 1998, a Primary Services Agreement was entered into by and between ISOLA A. G. and SUMISOLA whereby ISOLA A. G. had agreed to supply and make available to SUMISOLA the following: a) Accounting and financial "know-how" related to the valuation and appraisal services, b) Accounting and Economic Data Acquisition Scheme, c) Coordinate strategies and advise on management and business operation, d) Conduct procedural analysis on the nature of the business, e) Training of personnel in Germany and, f) Provide training materials and facilities to personnel; that in consideration of the aforementioned services, SUMISOLA shall pay ISOLA A. G. the amount of US$300,000.00 which shall be made in three installments and; that the Primary Services Agreement complies with the provisions of the Intellectual Property Code (IPC) as evidenced by the Certificate of Compliance No. 5-1999-00016 dated April 06, 1998, issued by the Intellectual Property Office (IPO). In reply, please be informed that Article 12 of the RP-Germany 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, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: "(a) 15 per cent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or "(b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. llcd "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 cinematograph films or tapes for television or broadcasting, any patent, trade mark 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. xxx xxx xxx" Inasmuch as the payments made by SUMISOLA to ISOLA A. G. are in consideration for the services involving the transfer of commercial / industrial know-how, and considering further that the herein Primary Services Agreement complies with the IPC as certified by the IPO, your application is hereby approved. Hence, the royalty remittances by SUMISOLA to ISOLA A. G. shall be subject to the preferential tax rate of 10% based on the gross amount of royalties. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. prcd Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group