ITAD Ruling No. 100-03

July 16, 2003 ITAD RULING NO. 100-03 Art. 12, RP-Netherlands tax treaty Secs. 25 (A) & 108 (A) (3) NIRC of 1997 BIR Ruling No. DA-ITAD-3-03 Watsons Personal Care Stores (Phils), Inc. A member of the A.S. Watson Group Building B, Bay Boulevard SM Central Business Park Bay City 1300 Pasay City Attention: Ms. Cecilia R. Patricio Senior Assistant Vice President Corporate Tax Division Gentlemen : This refers to your application for relief from double taxation dated June 12, 2003, requesting for a 15% preferential tax rate on the royalty payments relative to a Tradename License Agreement executed between WPCS (Philippines) Holdings B.V. (Watson Netherlands) and Watsons Personal Care Stores (Phils) Inc. (Watson Philippines) pursuant to the RP-Netherlands tax treaty. It is represented that Watson Netherlands is a corporation organized and existing under the laws of the Netherlands with principal address at Officia I De Boelelaan 7, 1083 HJ Amsterdam, P.O. Box 71744, 1008 DE Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as certified by the Securities and Exchange Commission dated March 27, 2003; that Watson Philippines is a corporation organized and existing under the laws of the Philippines with principal address at Unit 211 2nd Flr., The Podium, ADB Ortigas Commercial, Mandaluyong City; that on March 12, 2002, Watson Netherlands and Watson Philippines entered into a Tradename License Agreement wherein Watson Netherlands grants Watson Philippines an exclusive license to use in the Philippines its tradename and other intellectual property; that Watson Philippines may only use the tradename for its business such as the use of the tradename as part of the business name or corporate name of Watson Philippines and the display of the tradename in the premises of the stores; that in consideration thereof, Watson Philippines shall pay Watson Netherlands a license fee which shall be a sum equal to two percent (2%) of the "Annual Net Sales" which is defined as "the total sales of Watson Philippines less deductions for all rebates, discounts and other reductions and output payment by Watson Philippines of applicable value added tax, payable in US dollars; that the term of the license shall be effective as of March 12, 2002 and shall continue indefinitely unless terminated. In reply please be informed that Article 12 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 percent 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 DIETcH "(b) 15 percent of the gross amount of the "royalties in all other cases. "3. . . . "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 who is the beneficial owner thereof may be subject to the Philippine income tax at a rate not to exceed 10 percent of the gross amount of the royalties where such royalties 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. It is clear that the subject license fees to be paid by Watson Philippines to Watson Netherlands are in consideration for the use of "patent and trademark" and as such are royalties within the meaning of Article 12(4) as quoted above. Therefore, this Office is of the opinion and so holds that the subject license fees are subject to the preferential tax rate of 15 percent of the gross amount of royalties pursuant to the RP-Netherlands tax treaty. ( BIR Ruling No. DA-ITAD-3-03 dated January 15, 2003 ) Moreover, the herein royalty payments by Watson Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Watson Philippines, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of 10% final VAT before remitting any payment to Watson Netherlands. In remitting the VAT withheld, Watson Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Watson Philippines upon filing its own VAT, if it's a VAT-registered taxpayer. In case Watson Philippines 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, Watson Philippines is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of Watson Netherlands, the first three copies thereof to be given to Watson Netherlands and the fourth copy to be retained by Watson Philippines as its file copy. [ Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 14-2002 ] In view of all the foregoing, Watson Philippines shall be responsible for the withholding of the 10% VAT and income tax at the rate of 15% of the gross amount of royalties. 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 insofar as the herein parties are concerned. TACEDI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service