ITAD Ruling No. 109-05

September 21, 2005 ITAD RULING NO. 109-05 Article 12, Philippines-Belgium tax treaty BIR Ruling No. DA ITAD 038-04 Cochingyan & Peralta Law Offices 12th Floor, 139 Corporate Center 139 Valero Street, Salcedo Village Makati City Attention: Mr. Jose Cochingyan, III Gentlemen : This refers to your application for relief from double taxation dated May 13, 2005, on behalf of your client, Puratos S.A. (Puratos N.V.), hereinafter Puratos S.A., requesting confirmation of your opinion that the royalty payments to be made by Puratos (Philippines), Inc. (Puratos Phils.) to Puratos S.A. pursuant to their Production Contract is entitled to the preferential tax rate of 15% under Article V of The Protocol Amending the Philippines-Belgium tax treaty. It is represented that Puratos S.A. is a nonresident foreign corporation organized and existing under the laws of The Kingdom of Belgium with principal office at Industrialaan 25-Zone Maalbeek B-1702, Groot-Bijgaarden, Belgium; that it is not registered either as a corporation or partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 11, 2005; that Puratos Phils. is a corporation duly organized and existing under the laws of the Philippines with principal office at Mangosteen Street, corner DBP Ave.,FTI Complex Taguig, Metro Manila; that Puratos S.A. entered into a Production Contract (Contract) with Puratos Phils.,the effective date of which is January 1, 2003, wherein the former authorized the latter to manufacture and sell its products as stipulated therein provided that royalties are paid therefor, in accordance with the said Contract; and that per Appendix B of the Contract: A. Puratos Phils. shall pay a royalty to Puratos S.A. calculated on its net sales of products manufactured under Puratos license per Appendix A, according to the following scales: (1) a royalty of 4% will be paid for all products of which the usage level on dry matter is between +0% and 10%; (2) a royalty of 3% will be paid for all products of which the usage level on dry matter is between +10% and 40%;and (3) a royalty of 2% will be paid for all products of which the usage level on dry matter is between +40% and 100%. B. The Royalties cover the following: (1) transfer of certain know-how related to product formulation; (2) the right to use the PURATOS trade marks for the locally manufactured products under license, and possibly costs of registration of such trade marks (registration or not is a discretionary decision of PURATOS); HEAcDC (3) technical assistance during start up and afterwards for the factory; and (4) technical assistance for products and product development and adaptation. In reply, please be informed that Article V of the Superceding Protocol on Article 12 of the Philippines-Belgium tax treaty provides as follows: "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 that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 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 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. "xxx xxx xxx" Considering that Puratos S.A. is the beneficial owner of the royalties arising in the Philippines under the subject Contract, the royalty fees paid by Puratos Phils. to Puratos S.A. are subject to Philippine income tax at the preferential rate of 15% of the gross amount thereof, pursuant to Article V of the Superceding Protocol on Article 12 of the Philippines-Belgium tax treaty. Finally, Section 108(A)(1) of the Tax Code of 1997 states that " the lease or the use of the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right " falls within the definition of " sale or exchange of services " subject to the 10 percent value-added tax (VAT). Accordingly, the royalties paid by Puratos Phils. to Puratos S.A. shall be subject to 10 percent VAT. (BIR Ruling No. ITAD 038-04 dated April 28, 2004) Moreover, Puratos Phils.,being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10 percent VAT on such royalty payment before paying them to Puratos S.A. In remitting the VAT withheld, Puratos Phils. shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).If Puratos Phils. is a VAT-registered taxpayer, the duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input VAT by the Puratos Phils. upon filing its own VAT return. On the other hand, if Puratos Phils. is not a VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as an " expense " or " asset " on the part of the Puratos Phils., whichever is applicable. In addition, the Puratos Phils. is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, upon the request of Puratos S.A., the first three copies to be kept by the Puratos S.A. and the fourth copy by Puratos Phils. as its file copy. [Section 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-02, and Section 7 of Revenue Regulations No. 14-2002]. 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