ITAD Ruling No. 102-03

July 24, 2003 ITAD RULING NO. 102-03 RP-US tax treaty Art. 13 RP-China tax treaty Art. 12 Tax Code of 1997 Sec. 108 RMC 46-2002 DA-ITAD-101-03 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: George J. Lavadia Principal Tax Services Gentlemen : This refers to your letter dated March 19, 2003 requesting reconsideration of BIR Ruling No. DA-ITAD-102-02 dated May 28, 2002 wherein this Bureau confirmed that the royalty payments by your client, Energizer Philippines, Inc. (Energizer), to Eveready Battery Company, Inc. (Eveready) are subject to the preferential tax rate of fifteen percent (15%) pursuant to the "most favored nation" clause of the RP-US tax treaty in relation to the RP-Netherlands tax treaty. Relative to the abovementioned BIR ruling, it was represented that Eveready is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal office at Trust Center, 1209 Orange Street, City of Wilmington Delaware; 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 evidenced by the Certificate of Non-Registration issued by the Securities and Exchange Commission dated February 20, 2002; that Energizer is a corporation duly organized and existing under Philippine laws; that Eveready and Energizer entered into a Renewal Agreement dated October 11, 1994 whereby Eveready granted Energizer the right to use its trademarks and patents, technical information, business information, data, and know-how relating to the manufacture, use and sale of licensed products; that the said Agreement was duly registered with the then Technology Transfer Registry under Certificate of Registration No. 1652 dated January 19, 1995 and was renewed for another 10 years ending on October 15, 2009; and that in consideration of the aforementioned rights granted to Energizer, Energizer shall pay Eveready a royalty of three percent (3%), as amended, based on the net sales or net sale value of all the licensed products manufactured, used, sold or assigned by Energizer during the term of the Agreement. It is now your contention that the previous ruling has been superseded by Revenue Memorandum Circular No. 46-2002 (RMC 46-2002) dated September 2, 2002 in view of the "most favored nation" clause of the RP-US tax treaty in relation to the RP-China tax treaty. In reply, please be informed that, upon a careful review of your case, Article 13 of the RP-US tax treaty and Article 12 of the RP-China tax treaty provide as follows: "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" "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 laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: "a) 15 per cent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or "b) 10 per cent of the gross amount of royalties arising from the use of or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. (Emphasis supplied) For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. "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 cinematography films, or films or tapes for radio or television 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 aforequoted provisions, the tax imposed on royalties derived by a resident of the United States from sources within the Philippines may 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. Relative thereto, it is noteworthy that under Article 12(b) of the RP-China tax treaty, when appropriate, the tax charge shall not exceed 10% of the gross amount of royalties. In clarifying the above provisions, RMC 46-2002 provides that the 10% rate withholding tax on royalties shall apply if the following requirements concur: 1. That there be an agreement or a contract whereby the royalties paid to the US must originate from the use of, or the right to use any patent, trade mark, design or model, plan, secret formula or process, or from the use, or the right to use industrial, commercial or scientific experience; and 2. That for as the contract or agreement is subject to approval under Philippine law, the same must be duly approved by the Philippine competent authorities. Inasmuch as the Agreement clearly provides that the payment by Energizer of royalties to Eveready is in consideration for the grant of the right to use Eveready's trademarks and patents, technical and business information, date and know-how relating to the manufacture, use and sale of licensed products, and considering further that a Certificate of Compliance has been secured with the Intellectual Property Office (IPO) to the effect that the Agreement complies with Sections 87 and 88 of the Intellectual Property Code, the subject transaction, therefore, meets the requirements provided under RMC 46-2002. In view of all the foregoing, this Office is of the opinion and so holds that the royalty payments by Energizer to Eveready effective January 1, 2002 are subject to a preferential tax rate of not exceeding 10 percent of the gross amount of royalties pursuant to the "most favored nation" provision of the RP-US tax treaty, in relation to Article 12(2)(b) of the RP-China tax treaty. Energizer shall deduct and withhold the tax at the time the royalty income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, and whichever comes first. The term "payable" refers to the date the obligation become due, demandable, or legally enforceable. (BIR Ruling No. DA-ITAD-101-03 dated July 24, 2003; RMC 46-02 dated September 2, 2002) Moreover, the said royalty payments are subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Energizer being the payor in control of the payment shall, before making payments of royalties to Eveready, be responsible for withholding and remitting to this Bureau the 10% VAT due thereon by filing a separate VAT return for and on behalf of Eveready using BIR Form 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 sufficient basis for the claim of input tax to be applied against the output tax that may be due from Energizer if it is a VAT-registered taxpayer. In case Energizer is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as expense, whichever is applicable. In addition, Energizer is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of Eveready, the first three copies thereof to be given to Eveready and the fourth copy to be retained by Energizer as its file copy. [Section 4 & 6, Revenue Regulation No. 4-2002] In fine, Energizer shall be responsible for the withholding of income tax at the rate of 10% of the gross amount of royalties beginning January 1, 2002, and of the value-added tax at the rate of 10% of the contract amount. Accordingly, BIR Ruling No. DA-ITAD-102-02 is modified to the extent that it is inconsistent with this ruling. 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, (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service