ITAD Ruling No. 103-00

August 7, 2000 ITAD RULING NO. 103-00 Art. 13, RP-US ITAD # ITAD # Art. 12, RP-Netherlands 54-00 Quisumbing Torres Law Firm 11th Floor, Pacific Star Building Makati Ave., cor. Sen Gil J. Puyat Ave. 1200 Makati City Attention: Jose R. Sandejas and Jose Jaime V. Cruz Gentlemen : This refers to your letter dated February 22, 2000 requesting for confirmation of your opinion that the royalties to be paid by ITW Ampang Industries Philippines, Inc. (Ampang) to your client, ITW Illinois Tool Works, Inc. (ITW), is subject to the preferential tax rate of 15 per cent pursuant to the most favored nation clause of the RP-US Tax Treaty in relation to RP-Netherlands Tax Treaty. It is represented that ITW is a non-resident foreign corporation duly recognized and existing under the laws of the United States of America; that it is not registered as a corporation/partnership in the Philippines as per Securities and Exchange Commission certification issued September 21, 1999; that Ampang is a PEZA registered corporation duly organized and existing under Philippine laws; that ITW proposes to enter a Licensing Agreement with Ampang, whereby ITW will grant Ampang the exclusive right and license to practice and use the patents, trademarks, marketing support and the license technology for the manufacture and sale of the formers products in the Philippines for a duration of five years; that in consideration of the aforementioned rights to be licensed to Ampang, Ampang shall pay ITW a royalty of four per cent of the formers net sales on the products covered by the agreement. In reply, please be informed that under the most favored nation clause provision of the RP-US Tax Treaty [Article 13, paragraph (2) (b) III], the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall 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. Article 12, paragraph 2 (b) of the RP-Netherlands Tax Treaty provides that royalties arising from the Philippines and paid to a resident of Netherlands may also be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of royalties in cases other than royalties paid by an enterprise registered in preferred areas of activities in the Philippines. The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or right to use, any patent, trademark, design or model, secret formula or process, or for the use of, or the right to use of, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. A perusal of the RP-US and RP-Netherlands Tax Treaties, particularly their article on the avoidance of double taxation, show that there is a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit on both treaties is the amount actually paid in the Philippines. Such being the case, your opinion that the royalties to be paid by ITW Ampang Industries Philippines, Inc. (Ampang) to your client, ITW Illinois Tool Works, Inc. (ITW) is subject to the preferential tax rate of 15 per cent pursuant to the most favored nation provision of the RP-US Tax Treaty in relation to RP-Netherlands Tax Treaty is hereby confirmed. (ITAD No. 54-00 dated March 7, 2000) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group