ITAD Ruling No. 108-03

July 29, 2003 ITAD RULING NO. 108-03 RP-Singapore Tax Treaty, Articles 12 & 5 BIR Ruling No. ITAD-49-00; DA-ITAD-99-02; DA-ITAD-127-02; DA-ITAD-33-01 UCPB Properties, Inc . 3rd Floor Forbes Tower Valero Street, Salcedo Village Makati City Attention: Glenda de Jesus-Romulo Vice-President Gentlemen : This refers to your letter dated May 23, 2002 requesting for the availment of a preferential tax rate on the royalty payment of UCPB Properties, Inc. (UCPB) to Systems Union Software Pte. Ltd. Singapore (SUS) pursuant to the RP-Singapore tax treaty. Documents submitted show that SUS is a foreign corporation duly organized and existing under the laws of Singapore with office at 7 Temasek Boulevard #29-02 Suntec Tower One, Singapore 038987; that SUS 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 September 12, 2002; that UCPB is a corporation duly organized and existing under Philippine laws with office at 3rd Floor, Forbes Tower, Valero Street, Salcedo Village, Makati City; that on November 9, 2001, SUS and UCPB entered into a License and Maintenance Agreement whereby SUS shall provide software license and maintenance services in favor of UCPB, subject to the conditions set forth in the Agreement; that in consideration of the License and Maintenance Agreement, UCPB shall pay SUS S$56,615 for the Software and S$11,000 for Maintenance Services Charge during the first year of service. In reply, please be informed that Article 12 of the RP-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; TCAScE "(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" The tax treaty defines " royalties " to include "payments of any kind received as a consideration for information concerning industrial, commercial or scientific experience . " According to the commentaries of the ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. II, Commentary on Article 12 (royalties), 1998, p. 151], such information alludes to the concept of " know-how " which is "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique". In a know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, such special knowledge and experience which remain unrevealed to the public. ( BIR Ruling No. DA-ITAD 49-02 dated April 15, 2002 ) Based on the above, the herein payments by UCPB to SUS fall under the definition of "royalties" under Article 12 of the RP-Singapore tax treaty. Inasmuch as UCPB is neither registered with the Philippine Board of Investments (BOI) nor engaged in preferred areas of activities, and that the herein royalty payments are not in respect of cinematographic films and tapes for television or broadcasting, this Office is of the opinion and so holds that the royalty payments by UCPB to SUS are subject to the preferential withholding tax rate of 25% of the gross amount of royalties pursuant to Article 12(2)(c) of the RP-Singapore tax treaty. ( BIR Ruling No. DA-ITAD-99-02 dated May 22, 2002 ) However, as regards the payment for maintenance services, Article 5 of the RP-Singapore tax treaty applies, to wit: "Article 5 "PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the enterprise is wholly or partly carried on. "2. The term 'permanent establishment' includes specially but is not limited to: "xxx xxx xxx (j) The furnishing of services, including consultancy services, by a resident of one of the Contacting States through employees or other personnel, provided activities of the nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days." ITAaCc "xxx xxx xxx Thus, a corporation which is a resident of Singapore and which does not carry on business in the Philippines through a permanent establishment situated therein shall not be subject to Philippine income tax for profits derived in the Philippines. For this purpose, a Singapore corporation may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services through its employees continue, for the same or a connected project, within the Philippines for a period or periods aggregating more than 183 days, in which case, the profits shall be subject to tax imposed under Section 28 of the Tax Code of 1997. ( BIR Ruling No. ITAD-DA-127-02 dated August 2, 2002 ) On the other hand, the salaries, wages or similar remuneration derived by the personnel of SUS sent to the Philippines for the maintenance services may not be subject to Philippine income tax if the length of their stay in the Philippines does not exceed a period aggregating 183 days. Otherwise, the said income shall be subject to the rate of tax provided for under Section 25(A) of the Tax Code of 1997 on non-resident alien engaged in trade or business within the Philippines. ( BIR Ruling No. DA-ITAD 33-01 dated March 13, 2001 ) Moreover, the herein royalty payments by UCPB are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, UCPB, 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 SUS. In remitting the VAT withheld, UCPB 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 UCPB upon filing its own VAT, if it's a VAT-registered taxpayer. In case UCPB is a 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, UCPB is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of SUS, the first three copies thereof to be given to SUS and the fourth copy to be retained by UCPB 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] 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service