ITAD Ruling No. 082-04

August 5, 2004 ITAD RULING NO. 082-04 Article 13 Philippines-United States of America tax treaty Article 12 Philippines-China tax-treaty BIR Ruling No. ITAD 140-03 RMC No. 46-2002 Platon Martinez Flores San Pedro & Leao 6th Floor Tuscan Building, 114 Herrera Street Legaspi Village, Makati City Attention: Carlos G. Platon Anthony Brett M. Abenir Gentlemen : This refers to your application for relief from double taxation dated June 24, 2004, requesting confirmation of your opinion that the royalties paid by Havi Food Services Philippines, Inc. (Havi Phil) to Havi Group LP are subject to withholding tax at the rate of ten percent (10%) pursuant to the "most-favored-nation" clause of the Philippines-United States of America (Philippines-US) tax treaty in relation to the Philippines-China tax treaty. It is represented that Havi Group LP, formerly Perlman Acquisition LP and TFP Acquisition LP is a corporation organized and existing under the laws of the State of Delaware, U.S.A. with office address at 3010 Highland Parkway, Suite 400, Downers Grove, IL 60515, U.S.A; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 19, 2004; that Havi Phil is a corporation organized and existing under the laws of the Philippines with office address at Sumulong Highway, Marikina, Metro Manila; that on January 1, 2003, Havi Group LP and Havi Phil entered into a Distribution Technology Transfer Agreement whereby Havi Group LP granted Havi Phil the right to use its processes and methods, procedures and techniques on storing, handling, transporting and distributing perishable and non-perishable goods; that Havi Group LP also transferred to Havi Phil expertise, know-how, technical information, and substantial valuable knowledge of a specialized nature relating to basic operational technical aspects of such processes, methods, procedures and techniques relative to the operation of a warehouse and distribution centers; that in consideration of the rights, licenses and assistance granted to Havi Phil by Havi Group LP, Havi Phil shall pay Havi Group LP a minimum annual fee of Four Hundred Twenty Thousand US Dollars (US$420,000.00); that the said annual fee, however, may, upon written agreement by both parties, increase but shall in no event be less than the said amount; and that the said Distribution Technology Transfer Agreement was duly registered with the Intellectual Property Office (IPO) as evidenced by the Certificate of Compliance issued by the IPO on May 6, 2004. In reply, please be informed that Article 13 of the Philippines-US tax treaty provides as follows, viz : "Article 13 "ROYALTIES "1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. "2. However, the tax imposed by that other Contracting State shall not exceed a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. "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 or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term `royalties' also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. "xxx xxx xxx" and, in relation thereto, Article 12 of the Philippines-China 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. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, 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. "xxx xxx xxx" Pursuant to the aforequoted "most-favored-nation" clause under Article 13(2)(b)(iii) of the Philippines-US tax treaty, the tax imposed on royalties derived by a resident of the United States of America (US) from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. Relative thereto, pursuant to Article 12(2)(b) of the Philippines-China tax treaty, the tax charged shall not exceed 10% of the gross amount of royalties. It is noteworthy that in the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals , G.R. No. 127105, promulgated on June 25, 1999, the Supreme Court interpreted the "most-favored-nation" clause, particularly the phrase "paid under similar circumstances", as referring to the manner of payment of taxes and not to the subject matter of the tax which is royalties. ( BIR Ruling No. DA-ITAD 140-03 dated September 18, 2003 ) Article 23 of the Philippines-US tax treaty and Article 23 of the Philippines-China tax treaty, though differently worded, plainly reveal a similarity in the provisions on relief from or avoidance of double taxation to their respective residents. Thus, the tax on royalty payments to residents of US and China are paid under similar circumstances, i.e. , the amount of royalty income tax paid or accrued to the Philippines under the respective tax treaties is available as tax credit against the income tax payable in their respective countries. US residents may, therefore, invoke the preferential tax rate of 10% on royalties, accruing beginning January 1, 2002, arising in the Philippines "from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, . . ., or for information concerning industrial, commercial or scientific experience" under the Philippines-China tax treaty, pursuant to the "most-favored-nation" clause of the Philippines-US tax treaty. ( Revenue Memorandum Circular (RMC) No. 46-2002 dated September 2, 2002 ) Such being the case, this Office is of the opinion and so holds that the royalty payments of Havi Phil to Havi Group LP under the Distribution Technology Transfer Agreement shall be subject to the tax rate of ten percent (10%), pursuant to the Philippines-US tax treaty in relation to Article 12(2)(b) of the Philippines-China tax treaty. (RMC No. 46-2002 dated September 2, 2002 and BIR Ruling No. DA-ITAD 140-03 dated September 18, 2003) Moreover, the said royalty payments to be paid by Havi Phil to Havi Group LP are subject to the 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code of 1997. Accordingly, Havi Phil, 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 royalty before making any payment to Havi Group LP. In remitting the VAT withheld, Havi Phil shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Havi Phil upon filing its own VAT, if it is a VAT-registered taxpayer. In case Havi Phil 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 an "expense" or "asset" whichever is applicable. In addition, Havi Phil is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of Havi Group LP, the first three copies thereof to be given to Havi Group LP and the fourth copy to be retained by Havi Phil 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 ] 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. TCaSAH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service