ITAD Ruling No. 101-05

September 15, 2005 ITAD RULING NO. 101-05 Art. 2, Philippines-Singapore tax treaty DA-ITAD 24-00 Ms . Myrna Sobremonte Chief, Accounting Division Bureau of Internal Revenue NOB, Diliman, Quezon City M a d a m : This refers to the duly notarized ACL Software Purchase Agreement entered into between the Bureau of Internal Revenue (BIR) represented by its Assistant Commissioner, Virginia L. Trinidad and Prodigy Data Solution PTE Ltd. (PDSPL) represented by its Managing Director, Fransiskus Oey submitted to this Office for an issuance of a ruling regarding the preferential tax rates applicable on the royalty payments to be made by the BIR to PDSPL pursuant to Philippines-Singapore tax treaty. It is represented that PDSPL is a nonresident foreign corporation with office address located at 10 Shenton Way, MAS Building #11-02 Singapore 079117; that PDSPL is the only authorized distributor of ACL Services Limited for Southern Asia per Certification dated February 3, 2003; that ACL Services Limited is a nonresident foreign corporation with office address at 1550 Alberni Street, Vancouver, BC, Canada, V6G 1A5; that the BIR is in need of an ACL for Windows Version 8 Desktop Edition Software Package with standard support to be used by its Operations Group as their auditing tool; that on July 1, 2005, the BIR ordered from PDSPL ten (10) units ACL For Windows Version 8 Desktop Edition with standard support for the period July 1 to December 31, 2005; that in lieu of the said order, on August 3, 2005, PDSPL and the BIR entered into an ACL Software Purchase Agreement (First Agreement) under the following terms and conditions: "1. Software License : The ACL for Windows Version 8, Desktop Edition software is provided as non-customized software and the use is governed by the ACL Software License Agreement that is contained in the software and is required to be accepted by BIR in order to install the software. 2. Technical Support . PDSPL provides technical support services (Annex "A") for the Software, including, but not limited to, upgrades of the Software within the duration of the Contract. 3. Duration of Technical Support Contract . This contract shall be from July 1 to December 31, 2005. 4. Terms of Payment . The total fees for the ACL for Windows Version 8, Desktop Edition with Standard Support amounts to US$15,760.00 or Peso equivalent amounting to PhP891,858.40 (@ 56.59/US$ Land Bank Rate). Payment shall be exclusive of any applicable taxes, customs, duties or other government fees." In reply, please be informed that Article 12 of the Philippines-Singapore 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, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: (a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; (c) in all other cases, 25 per cent of the gross amount of the royalties. "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 tapes for television or broadcasting, any patent, trade mark, 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 Singapore who is the beneficial owner thereof may be subject to Philippine income tax at a rate not to exceed 15 percent of the gross amount of the royalties where such royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also where such royalties are paid in respect of cinematographic films or tapes for television or broadcasting, or 25 per cent of the gross amount of the royalties in all other cases. In view thereof, the royalty fees that would be paid by the BIR to PDSPL under the ACL Software Purchase Agreement are subject to the preferential tax rate of 25 percent, based on the gross amount of royalties, pursuant to the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD 24-00 dated January 28, 2000) Moreover, the subject royalty payments by BIR to PDSPL are subject to the 10% value-added tax pursuant to Section 106 of the Tax Code of 1997, as amended. In fine, BIR shall be responsible for the withholding of the final income tax at the rate of 25% based on the gross amount of the royalties and the 10% VAT. This ruling is issued on the basis of 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service