ITAD Ruling No. 076-03

June 4, 2003 ITAD RULING NO. 076-03 Articles 12, RP-Spain Secs. 108 & 109, NIRC BIR Ruling No. DA-ITAD-32-03 Joyco Universal Robina Corporation 3/F CFC Administration Bldg. 13 E. Rodriguez Avenue Bagong Ilog, Pasig City Attention: Alfredo U. Estioko General Manager This refers to your letter dated April 11, 2003, requesting confirmation that the royalties paid to JOYCO ESPAA S.A. (JOYCO) by JOYCO UNIVERSAL ROBINA CORPORATION (URC) are subject to the preferential tax rate of ten per cent (10%), pursuant to the Philippines-Spain tax treaty. It is represented that JOYCO is a corporation organized and existing under the laws of Spain with office address at Via Augusta nr 2 bis. 3a Planta 08006 Barcelona, Espaa; 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 October 16, 2002; that URC is a corporation organized and existing under and by virtue of Philippine laws with office address at 3F CFC Administration Building, No. 13 E. Rodriguez, Jr. Avenue, Bagong Ilog, Pasig City; that URC is a Board of Investments (BOI)-registered enterprise per Certificate of Registration No. EP 2001-041 dated March 7, 2001, and is engaged in a preferred area of activity as New Export Producer of Confectionery Products per BOI certification dated January 16, 2003; that URC is engaged in the manufacture, process, packing and selling at wholesale, import and export of confectionary and other confectionary products of every class and description, but limited to hard boiled lollipops, bubble gums and chewing gums; that on August 03, 2000, a Joint Venture Agreement (Agreement) was entered into by and between JOYCO and URC, whereby JOYCO shall provide URC the know-how currently owned by the former to produce lollipop candies and bubble gums as specified in the Agreement, and that JOYCO shall grant URC the exclusive license to use the brands "Trex" "Pim Pom" "Boomer" and "Dunkin" belonging to JOYCO; that in consideration, URC shall pay JOYCO royalty fees as provided for under Article 6, par. 6.5 of the Agreement; that the said Agreement complies with Sections 87 and 88 of the Intellectual Property Code (Republic Act No. 8293) on Voluntary Licensing per Certificate of Compliance No. 5-2000-00062 dated October 11, 2000 issued by the Intellectual Property Office. In reply, please be informed that Article 12 of the RP-Spain 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 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, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: (a) 10 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; (b) 20 per cent in respect of cinematographic films or tapes for television or broadcasting; and (c) 15 per cent of the gross amount of the royalties in all other cases. "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 works, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television. xxx xxx xxx" Based on the above provisions, royalties which arise in the Philippines and paid to a resident of Spain may be taxed in the Philippines at a preferential rate of ten per cent (10%) if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred areas of activities, twenty per cent (20%) if the payments are in respect of cinematographic films or tapes for television or broadcasting, and in all other cases, fifteen per cent (15%) of the gross amount of royalties. CSDAIa Such being the case, since URC is a BOI-registered enterprise and engaged in preferred areas of activities, this Office is of the opinion and so holds that the herein payments are subject to tax at 10% of the gross amount of royalties, pursuant to Article 12(2)(a) of the RP-Spain tax treaty. (DA-ITAD-32-03 dated February 13, 2003) However, the royalty fees to be paid by URC to JOYCO are subject to 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, URC, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such fees before any payment to JOYCO. In remitting the VAT withheld, URC 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 URC upon filing its own VAT, if it is a VAT-registered taxpayer. In case URC 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, URC is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of JOYCO, the first three copies thereof to be given to JOYCO and the fourth copy to be retained by URC 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 on the basis of 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, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service