ITAD Ruling No. 097-01

October 19, 2001 ITAD RULING NO. 097-01 Articles 12, RP-Netherlands Tax Treaty BIR Ruling No. 077-96 Smart Communications, Inc. Rufino Pacific Tower 6784 Ayala Avenue Makati City 1226 Attention: Rina R. Manuel Tax and Regulatory Manager Gentlemen : This refers to your application for relief from double taxation dated March 16, 2000, requesting confirmation of your opinion that the payments to be made by your company to ASIA LINK, B.V. are subject to the preferential tax rate of 10%, pursuant to the RP-Netherlands Tax Treaty. It is represented that your company, SMART COMMUNICATIONS, INC. (SMART), is a domestic corporation engaged in the operation of integrated telecommunications services throughout the Philippines; that on March 8, 1994, SMART registered with the Board of Investments (BOI) as new operator of a nationwide enhanced cellular mobile telephone system (CMTS) on preferred non-pioneer status under the Omnibus Investments Code of 1997 (EO 226) as per Certificate of Registration No. 94-034 dated March 8, 1994; that on August 26, 1997, SMART registered anew its CMTS operations with the BOI as an expanding operator also on a preferred non-pioneer status as per Certificate of Registration No. 97-117 dated August 26, 1997; that in line with its operations, SMART entered into an agreement with ASIA LINK, B.V. (ALBV), a non-resident foreign corporation domiciled in The Netherlands, for technical support services and assistance; that under said agreement, ALBV agrees to make available to SMART its patents, patent applications, know-how's (including engineering and manufacturing assistance), applications and designs for the built-out and maintenance of CMTS; and that in consideration of said services, SMART agreed to pay a royalty of two percent (2%) based on its net revenues. In reply, please be informed that Article 12 of the RP-Netherlands Tax Treaty provides as follows: "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. Based on the above, considering that SMART is engaged in preferred areas of activities as certified by the BOI, this Office hereby confirms that the royalty arising in the Philippines and payable to ALBV by SMART, under such agreement, is subject to the preferential royalty tax rate of 10% of the gross amount of the royalties. (BIR Ruling No. 077-96) Furthermore, under Section 108 of the Tax Code of 1997, the royalty payments to be remitted by SMART is subject to the 10% value-added tax. Accordingly, SMART shall, before making payment of royalties to ALBV, 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 ALBV. The duly validated VAT declaration/return is sufficient evidence for SMART in claiming input tax credit. [Section 4.102.1 (b) of Revenue Regulations No. 7-95] In view of all the foregoing, SMART shall be responsible for the withholding of income tax at the rate of 10% of the gross amount and the value-added tax at the rate of 10% of the contract amount. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said 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 and Inspection Group