ITAD Ruling No. 073-03

May 27, 2003 ITAD RULING NO. 073-03 Art. 12, RP-Switzerland tax treaty BIR Ruling No. ITAD 45-99 Paras and Manlapaz 1402 Equitable Bank Tower 8751 Paseo de Roxas Makati City Attention: Mr. Agenico T. Paras Ms. Siddharta JP III S. Pearedondo Gentlemen : This refers to your application for relief from double taxation dated October 21, 2002, requesting for 15% preferential tax rate on the royalty payments of VSL Philippines Inc. (VSL-Philippines) to VSL International Ltd. (VSL-Switzerland) pursuant to the RP-Switzerland tax treaty. It is represented that VSL-Switzerland is a non-resident foreign corporation organized and existing under the laws of Switzerland with principal address at Scheibenstrasse, 70-CH, Bern, Switzerland; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated August 29, 2002; that VSL-Philippines is a corporation duly organized and existing under the laws of the Philippines with principal address at 4/F RFM Corporate Center Building, Pioneer cor. Sheridan Sts., Mandaluyong City; that the nature of VSL-Philippines' business involves the application and sale of engineering services using the technology and designs of VSL-Switzerland; that VSL-Switzerland and VSL-Philippines entered into a License Agreement dated January 1, 2002 whereby the former, being the inventor of the VSL System, grants the latter an exclusive license under the Patent Rights, Know-how and Trademarks to: (1) promote, market, use, apply and exploit the VSL Systems in the Territory; (2) manufacture certain components of the VSL Systems pursuant to the provisions in subsection 10.2 of the agreement; and (3) sell and distribute the components to third parties in the Territory; that in consideration for the rights granted under the agreement, VSL-Philippines shall pay VSL-Switzerland the following license fees: (1) 3% of VSL-Philippines annual audited turn over, excluding VAT; and (2) irrespective of the turn over actually achieved by VSL-Philippines, the license fees payable to VSL-Switzerland shall not be less than Ten Thousand Swiss Francs (10,000-CHF) each year; that any and all license fees shall be paid in annual installments calculated from January 1st to December 31st of each year, free of any taxes, levies, dues, transfer charges, and other deductions. In reply, please be informed that Article 12 of the RP-Switzerland tax treaty provides: "Article 12" "Royalty" "1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. aHSAIT "2. However, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of the State, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. "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 cinematographic films and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. "xxx xxx xxx" Based on the aforequoted provisions the tax imposed on royalties derived by a resident of Switzerland from sources within the Philippines may be taxed in the Philippines at a rate not exceeding 15% percent of the gross amount of the royalties. In view thereof, your application for tax treaty relief is hereby granted at a final withholding tax rate of 15 per cent of the gross amount of the royalties (BIR Ruling No. ITAD 45-99 dated December 2, 1999). However, since VSL-Philippines shoulders the tax imposed on this income, the withholding tax rate of 15% shall be computed on the grossed-up monetary value of the royalty payments. The correct tax base is arrived at by dividing the monetary value of the royalty payments by eighty-five per cent (85%). Moreover, the royalty payments by VSL-Philippines for the exclusive license provided by VSL-Switzerland in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, VSL-Philippines, 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 VSL-Switzerland. In remitting the VAT withheld, VSL-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by VSL-Philippines upon filing its own VAT, if it is a VAT-registered taxpayer. In case VSL-Philippines 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 "expense" or "asset" whichever is applicable. In addition, VSL-Philippines is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of VSL-Switzerland, the first three copies thereof to be given to VSL-Switzerland and the fourth copy to be retained by VSL-Philippines as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 14-2002] This ruling is issued based on the facts as represented. However, if upon investigation, it shall be disclosed that the said facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. cADEHI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service