ITAD Ruling No. 087-01

October 12, 2001 ITAD RULING NO. 087-01 Article 12, RP-Netherlands BIR Ruling No. 077-96 Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City, Manila Attention: Mr. Alexander B. Cabrera Partner, Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated June 1, 2000 on behalf of your client Halifax Davao Hotel, Inc. (HDHI) requesting for a preferential tax rate of 10% on its royalty payments to Marco Polo Hotels Licensing B.V. (MPHLBV) pursuant to Article 12(2)(a) of the RP-Netherlands Tax Treaty. It is represented that HDHI is a corporation duly organized and existing under and by virtue of the laws of the Philippines with principal address at C.M. Recto Street, Davao City, Philippines; that HDHI is registered with the Board of Investments (BOI) as a pioneer enterprise [new operator of tourist accommodation facilities (hotel)] per Certificate of Registration No. 97-182 dated August 13, 1997; that MPHLBV is a corporation duly organized and existing under the laws of Netherlands with registered office at Emmaplein 5, 1075 AW, Amsterdam, the Netherlands; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission (SEC) dated September 4, 2000; that on May 16, 1996 and on October 14, 1997, HDHI entered into a Trademark License Agreement and Amendment to the Trademark License Agreement, respectively, with MPHLBV, whereby the latter granted the former exclusive license to operate a hotel in Davao City under the Marco Polo trademark; that in consideration for the said rights, MPHLBV shall receive royalty fees equivalent to zero point five percent (0.5%) of the hotel's gross revenue payable in United States dollars; and that the said Trademark License Agreement and its Amendment are duly registered with the Bureau of Patents, Trademarks and Technology Transfer (now the Intellectual Property Office) of the Department of Trade and Industry under Certificate of Registration No. 2029 dated October 20, 1997, which is valid until May 15, 2001. In reply, please be informed that Article 19 of the RP-Netherlands Tax Treaty provides, viz: "Article 12 ROYALTIES "1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State." 2. However, such royalties may also be taxed in the 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) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. "3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. "4. 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 radio or television broadcasting, 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. "xxx xxx xxx" Based on the foregoing, royalties arising in the Philippines and paid to a resident of the Netherlands may be subject to Philippine tax at a rate not to exceed 10 percent of the gross amount of royalties where such are paid by an enterprise registered and engaged in preferred areas of activities, or 15 percent of the gross amount of the royalties in all other cases. Such being the case and since HDHI is BOI-registered and engaged in preferred areas of activities in the Philippines, this Office hereby confirms your opinion that the royalty remittances of HDHI to MPHLBV are subject to tax at a rate of 10 percent of the gross amount of the royalties. (BIR Ruling No. 77-96 dated July 12, 1996) Finally, under Section 108 of the Tax Code of 1997, such royalty payments are subject to the 10% value-added tax (VAT). Accordingly, HDHI shall, before making payment of royalties to MPHLBV, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for and on behalf of MPHLBV. The duly validated VAT declaration/return is sufficient evidence for HDHI in claiming input tax credit. [Section 4.102.1(b) of Revenue Regulations No. 7-95] This ruling is issued on the basis of the foregoing 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group