ITAD Ruling No. 092-05

September 1, 2005 ITAD RULING NO. 092-05 Article 12 of the Philippines-Netherlands tax treaty BIR Ruling No. DA-ITAD-3-03; BIR Ruling No. DA-ITAD-20-04; VAT Ruling No. 16-00; VAT Ruling No. 100-99 Angara Abello Concepcion Regala & Cruz ACCRA Building, 122 Gamboa Street Legaspi Village, Makati City Attention: Ms. Ruby Rose J. Yusi Mr. Eric R. Recalde Gentlemen : This refers to your letter dated March 14, 2005, on behalf of your client Koninklijke Philips Electronics NV (KPENV), requesting confirmation of your opinion that fees paid by Philips Semiconductors Philippines, Inc. (PSPI) and Philips Electronics Lighting. Inc. (PELI) under their respective General Services Agreements constitute royalties subject to the preferential tax rate of fifteen percent (15%) pursuant to Article 12 of the Philippines-Netherlands tax treaty. It is represented that KPENV is a corporation duly organized and existing under the laws of The Netherlands with principal address at Eindhoven, The Netherlands; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 15, 2004; that PSPI is a corporation duly organized and existing under the laws of the Philippines and registered with the Philippine Economic Zone Authority (PEZA) with principal address at Cabuyao Plant, LISSPP, PEZA, BO. DIEZMO, Cabuyao, Laguna; that PELI is a corporation duly organized and existing under the laws of the Philippines with principal address at 48th Floor, PBCom Tower, Rufino St., cor. Ayala Avenue, Makati City; that on June 14, 2004, PSPI and PELI entered into separate General Services Agreements with KPENV (with KPENV acting at the same time for its Associated Companies 1 registered in The Netherlands) whereby the latter agreed to render the following services to both PSPI and PELI: (a) to make available and give PSPI and PELI access to its current know-how, experience and informative data on technological matters and to provide technical assistance and support to the extent to which KPENV has the free right to do so; HIEAcC (b) to grant PSPI and PELI a non-exclusive, non-transferable and indivisible license under all existing and future patent rights in the Philippines under which KPENV is or will be entitled to grant such license; (c) to make available to PSPI and PELI its current know-how, experience and informative data relative to commercial, accounting, auditing, financial, fiscal, social and legal matters and on such other subjects with regard to which KPENV has from time to time current know-how and experience available, and to advise and assist PSPI and PELI in the use and application of such KPENV's know-how experience and data; and that in consideration of the services rendered by KPENV, PSPI and PELI agreed to pay a remuneration by aggregating amounts calculated as follows: (a) that part of KPENV's development costs per product or group of products which corresponds to the ratio between PSPI and PELI's production of said product or group of products and the production by KPENV's companies of said product or group of products determined in accordance with KPENV's accounting principles; (b) that part of KPENV's costs (differentiated into cost groups, if applicable) which corresponds to the ratio between the Relevant local turnover and the Relevant world turnover; (c) a surcharge of 10% on the amounts as calculated according to (a) and (b) above; (d) less KPENV's development costs and KPENV's costs actually incurred by PSPI and PELI with a 10% surcharge. In reply, please be informed that Article 12 of the Philippines-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. TSCIEa "xxx xxx xxx" "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 above, royalties arising in the Philippines and paid to a resident of The Netherlands may be subject to Philippine income tax at a rate not to exceed 10 percent of the gross amount of the 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, where the recipient is the beneficial owner of the royalties. In view thereof, this Office is of the opinion and so holds that the subject royalty payments made by PSPI and PELI to KPENV are subject to the preferential tax rate of 15 percent of the gross amount of royalties pursuant to the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD-3-03 dated January 15, 2003) In addition, Section 108 of the Tax Code of 1997 (Tax Code) states that the lease or use of any trademark, trade brand or other like property or right is embraced within the definition of "sale or exchange of services" and is subject to value-added tax (VAT). However, pursuant to VAT Ruling No. 100-99, dated September 16, 1999, the dispositive portion of which provides: " In the case of payment for royalties to a non-resident owner, the responsibility for withholding the VAT and paying the same rests on the payor: However, since PEZA-registered export enterprise may not be passed on with nor claim input VAT, then payment of royalties to a non-resident lessor; . . . , should be as it is hereby confirmed to be, exempt from VAT. " Accordingly, payment of royalties by PSPI, a PEZA-registered corporation, to KPENV, a nonresident owner is hereby confirmed to be exempt from VAT. SEHaTC However, royalty payments by PELI to KPENV are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, PELI, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT before any payment to KPENV. In remitting the VAT withheld, PELI 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 proof of payment thereof shall serve as documentary substantiation for the claim of input tax by PELI upon filing its own VAT return, if it is VAT-registered taxpayer. In case PELI is 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, PELT is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of KPENV, the first three copies thereof to be given to KPENV and the fourth copy to be retained by PELI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR No. 14-2002] In fine, the royalty payments by PSPI to KPENV shall be subject to the 15% preferential withholding tax rate but it shall be exempt from VAT, PSPI being a PEZA-registered enterprise. On the other hand, the royalty payments by PELI to KPENV shall also be subject to 15% preferential withholding tax rate and it shall be further subject to 10% VAT. 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 as the herein parties are concerned. EDISaA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. ASSOCIATED COMPANIES: Any company or other legal entity, present or future, in which Philips or the Company owns or controls, directly or indirectly, at any time more than seventy-five (75) per cent of the issued share capital or more than seventy-five (75) per cent of the voting power therein, as well as any company or other legal entity, present or future, exactly seventy-five (75) per cent of which, or exactly seventy-five (75) per cent of the issued share capital of which, is at any time owned or controlled, directly or indirectly, by Philips or the Company and with respect to which company or other legal entity Philips or the Company, as the case be, has the power to direct its business activities. However, any such company, shall be deemed to be an Associated Company only for as long such ownership, power or control exists.