ITAD Ruling No. 078-04

August 4, 2004 ITAD RULING NO. 078-04 Article 12, Philippines-Australia tax treaty BIR Ruling No. ITAD 003-03 Cochingyan & Peralta Law Offices 6th Floor, Richmonde Plaza 21 San Miguel Avenue Ortigas Center, Pasig City Attention: Jose Cochingyan, III Gentlemen : This refers to your application for relief from double taxation dated May 11, 2004, on behalf of your client Computershare Technology Services Pty Ltd. (CTS Australia) requesting confirmation that the royalty payments made by Computershare Technology Services (Philippines) Inc. (CTS Philippines) to Computershare Australia, is subject only to a 25% preferential tax rate, pursuant to the Philippines-Australia tax treaty. It is represented that CTS Australia, is nonresident foreign corporation organized and existing under the laws of Australia with principal office at 18-62 Trenerry Crescent, Abbotsford, Victoria, 3067, Australia; that it is not registered either as a corporation or as a partnership engaged in trade or business in the Philippines per certification issued by the Securities and Exchange Commission dated February 4, 2004; that CTS Philippines is a corporation duly organized and existing under the laws of the Philippines with principal office address at Unit 17-62 Cititower, 8741 Paseo de Roxas, Makati City, Philippines; that CTS Australia owns a software known as "Computershare X-Stream" (Software) and all its updates; that on October 20, 2003, CTS Australia and CTS Philippines entered into an agreement wherein CTS Australia agreed to grant CTS Philippines a non-exclusive license to market the Software in the Philippines and to license any person to use the Software in the Philippines; and that CTS Philippines agreed to pay CTS Australia the amount of 70% of the revenue, net of tax, received by CTS Philippines from the licensed users of the Software; In reply, please be informed that Article 12 of the Philippines-Australia tax treaty provides as follows: "Article 12 "ROYALTIES "1. Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, 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, the tax so charged shall not exceed a) 15 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; and b) in all other cases, 25 percent of the gross amount of the royalties. "3. The term "royalties " in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for a) the use of, or right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; b) the use of, or the right to use, any individual, commercial or scientific equipment; c) the supply of scientific, technical, industrial or commercial knowledge or information; d) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c); e) the use of, or the right to use (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; or f) total or partial forbearance in respect of the use of a property or right referred to in this paragraph. "xxx xxx xxx" Based on the above, royalties arising in the Philippines and paid to a resident of Australia may be subject to Philippine income tax at a rate not to exceed 15 per cent of the gross amount of the royalties where such are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities, or 25 per cent of the gross amount of the royalties in all other cases, where the recipient is the beneficial owner of the royalties. The license fees to be paid by CTS Philippines to CTS Australia are considered "payments of any kind received as a consideration for the use of, or the right to use information concerning industrial, commercial or scientific experience" and as such are royalties within the meaning of the aforequoted Article. Since CTS Philippines is not an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities, this Office is of the opinion and so holds that the subject license fees are subject to the preferential tax rate of 25 per cent of the gross amount of royalties pursuant to the Philippines-Australia tax treaty. ( BIR Ruling No. 003-03 dated January 15, 2003 ) Moreover, the royalty payments by CTS Philippines to CTS Australia pursuant to the Software license granted are subject to the 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, CTS 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 CTS Australia. In remitting the VAT withheld, CTS 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 CTS Philippines upon filing its own VAT, if it is a VAT-registered taxpayer. In case CTS Philippines in 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, CTS Philippines is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of CTS Australia, the first three copies thereof to be given to CTS Australia and the fourth copy to be retained by CTS Philippines as its file copy. [Section 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 14-2002] In view of all the foregoing, CTS Philippines shall be responsible for the withholding of the 10% VAT and income tax at the preferential rate of 25%, both rates shall be based on the gross amount of royalty payments by CTS Philippines to CTS Australia. This ruling is issued based on 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. ITaCEc Very truly yours, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service