ITAD Ruling No. 091-02

May 14, 2002 ITAD RULING NO. 091-02 RP-US tax treaty Art. 13 RP-Russia tax treaty Art. 12 BIR Ruling No. ITAD-128-01 Transitions Optical Philippines Inc. Block 4, Lot 1, Star Avenue, Laguna International Industrial Park, Mamplasan, Bian, Laguna Attention: Ms. Suzanne B. Mondonedo Finance Manager Gentlemen : This refers to your letter dated August 09, 2001 requesting for an opinion as to the applicable tax rate on your royalty payments to PITTSBURGH PLASTIC GLASS INDUSTRIES, INC. ("PPG"), pursuant to a Technology License and Technical Assistance Agreement. It is represented that both PPG and TRANSITIONS OPTICAL INC. ("TOI") are non-resident foreign corporations respectively organized and existing under the laws of the States of Pennsylvania and Delaware, U.S.A.; that both companies are not registered either as a corporation or as a partnership licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission dated July 03, 2001; that TRANSITIONS OPTICAL PHILIPPINES INC. ("TOPI"), on the other hand, is a PEZA-registered corporation duly organized and existing under Philippine laws; that on July 31, 1990, PPG and TOI entered into a Technology License and Technical Assistance Agreement ("Technology Agreement") whereby PPG conveyed to TOI rights over certain Technical Data and certain Patents, and also PPG's trademark "TRANSITIONS"; that on February 01, 1999, an addendum to the Technology Agreement was entered into between PPG, TOI and TOPI whereby the joinder of TOPI was agreed upon such that in every provision where the term "Company" appears in the Technology Agreement, the term "Company" shall include TOPI; that TOI and TOPI shall pay royalties to PPG in consideration for the rights granted by the latter. Based on the above representation, it is your opinion that the royalty payments of TOPI to PPG is subject to the lower tax rate of fifteen per cent (15%) applying Article 13(2)(b)(iii), the "most-favored-nation clause," of the RP-US tax treaty. In reply, please be informed that Article 13 of the RP-US tax treaty provides, 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) . . . (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." (Emphasis supplied) "(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 RP-Russia 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, 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 royalties. (Emphasis supplied) "xxx xxx xxx" Based on the aforequoted provisions, the tax imposed on royalties derived by a resident of the United States from sources within the Philippines when applicable, 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. Article 12(2) of the RP-Russia tax treaty provides that royalties arising from the Philippines and paid to a resident of Russia may also be taxed in the Philippines but the tax so charged shall not exceed 15% of the gross amount of royalties. The term "royalties" as used in this Article means any payment of any kind received as a consideration for the use of, or right to use, any copyright of literary, artistic or scientific work including cinematograph films and films and tapes for television or radio broadcasting, any patent, trademark, design or model, secret formula or process, or for the use of, or the right to use of, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (BIR Ruling No. ITAD-128-01 dated December 21, 2001) A perusal of the RP-US and RP-Russia tax treaties, particularly their provisions on the avoidance of double taxation, shows a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit in both treaties is the amount actually paid in the Philippines. Such being the case, this Office is of the opinion and so holds that the royalties paid by TOPI to PPG pursuant to the Technology License and Technical Assistance Agreement are subject to tax at the rate of 15% pursuant to the "most-favored-nation" clause of the RP-US tax treaty in relation to the RP-Russia tax treaty. (BIR Ruling No. ITAD-128-01 dated December 21, 2001) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service