ITAD Ruling No. 103-03

July 24, 2003 ITAD RULING NO. 103-03 RP-US Tax Treaty, Article 13 RP-Russia Tax Treaty, Article 12 RP-China Tax Treaty, Article 12 BIR Ruling No. DA-ITAD-101-03 Baniqued & Baniqued Attorneys at Law Suite 803, 8/F Jollibee Centre San Miguel Avenue Ortigas Center, Pasig City Attention: Atty. Carlos G. Baniqued Atty. Laura Victoria Yuson-Layug Gentlemen : This refers to your application dated August 6, 2002 requesting confirmation of your opinion that: (1) the royalties accrued and/or paid by The Coca-Cola Export Corporation (TCCEC) to The Coca-Cola Company (TCCC) prior to January 1, 2002 are subject to 15% withholding tax, pursuant to the RP-US tax treaty in relation to the RP-Russia tax treaty; (2) royalties accrued and/or paid by TCCEC to TCCC beginning January 1, 2002 are subject to 10% withholding tax, pursuant to the RP-US tax treaty in relation to the RP-China tax treaty; and (3) the royalties actually remitted by TCCEC to TCCC are subject to 10% value-added tax. It is represented that TCCC is a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware, United States of America with office at One Coca-Cola Plaza, N.W., City of Atlanta, State of Georgia 30313, United States of America; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission, dated January 28, 2002; that TCCEC, with a place of business at 10th Floor, King's Court Building, 2129 Chino Roces Avenue, Makati City, is the Philippine Branch of The Coca-Cola Export Corporation, another corporation organized and existing under the laws of the State of Delaware, U.S.A.; that on January 1, 2001, TCCC and TCCEC entered into a Royalty Agreement per Certificate of Compliance No. 5-2002-00110 of the Intellectual Property Office whereby TCCEC agreed to pay TCCC a license fee for the use of certain trademarks, secret processes and formulae, and other confidential know-how and for the use of other intangibles relating to or in connection with the manufacture of concentrates beverage bases and syrups used in the preparation of certain beverages; that under such Royalty Agreement, the license fee or royalty to be paid by TCCEC to TCCC shall be computed based on TCCEC's operating profit; that the license fee or royalty shall be calculated by deducting from TCCEC's operating profit 10% of net revenues inclusive of service fees; that the remainder will be the "Base of Royalty"; that Royalty will be an amount equal to 50% of the Base of Royalty, less pro-rata expenses paid by TCCEC to The Coca-Cola Export Corporation, Atlanta, Georgia. HcTEaA In reply, please be informed that Article 13 of the RP-US tax treaty provides, viz : "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) In the case of the United States, 15 percent of the gross amount of the royalties, and "(b) In the case of the Philippines, the least of: "(1) 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" Under the "most favored nation" clause found in Article 13(2)(b)(iii) of the RP-US Tax Treaty, the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of the Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. In this light, Article 12 (Royalties) of the RP-Russia 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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of the State, but the tax so charged shall not exceed 15 per cent of the gross amount of 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 cinematograph films and films and tapes for television or radio 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. DaEcTC "xxx xxx xxx" Moreover, Article 12 (Royalties) of RP-PROC tax treaty provides: "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. 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. In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals , G.R. No. 127105, promulgated on June 25, 1999, the Supreme Court interpreted the "most favored nation" clause, particularly the phrase "paid under similar circumstances", as referring to the manner of payment of taxes and not to the subject matter of the tax which is royalties. A perusal of the RP-US, RP-Russia and the RP-China tax treaty provisions on the avoidance of double taxation shows a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit on the three treaties is the amount actually paid in the Philippines. Such being the case, and since TCCEC is not registered and engaged in preferred areas of activities in the Philippines, royalties arising in the Philippines and payable to TCCC for 2001 are subject to tax at the rate of 15 per cent (15%) while royalty payments accruing beginning January 1, 2002 shall be subject to 10 per cent (10%) pursuant to Article 13(2)(b)(iii) of the RP-US tax treaty, in relation to Article 12(2)(b) of the RP-Russia and RP-China tax treaties, respectively. ( BIR Ruling No. DA-ITAD 101-03 dated July 24, 2003; RMC 46-42 dated September 2, 2002 ) Moreover, the said royalty payments shall be subject to the 10% value-added tax (VAT) under Sec. 108(A)(1) and (3) of the Tax Code of 1997. Section 4.102-1(b) of the Revenue Regulation No. 7-95 provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600 Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." In fine, TCCEC shall be responsible for the withholding of income tax at the rate of 15% for the year 2001 of the gross amount of royalties paid and 10% for the succeeding years and the value-added tax at the rate of 10% of the contract amount. This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. DCcAIS Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service