ITAD Ruling No. 115-01

November 27, 2001 ITAD RULING NO. 115-01 RP-US-Article 13 RP-Denmark Article 12 BIR Ruling No. ITAD-123-00 McCormick Philippines, Inc. 145 Panay Avenue, Quezon City Attention: Ms. Rebecca Ann K. Sy Treasurer Gentlemen : This refers to your letter dated July 23, 2001 requesting confirmation that your royalty payments to McCORMICK & COMPANY, INC. ("MCI") are subject to the withholding tax rate of fifteen percent (15%) pursuant to the "most-favored-nation" clause [Article 13(2)(b)(iii)] of the RP-US tax treaty in relation to Article 12(2) of the RP-Denmark tax treaty. It is represented that MCI is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of the State of Maryland, engaged in the business of manufacturing and selling spices, herbs, seasoning blends, sauces, extracts, flavors and other specialty food products; that it is not licensed to engage in business in the Philippines per the Securities and Exchange Commission (SEC) letter dated July 04, 2001; that McCORMICK PHILIPPINES, INC. ("MPI"), on the other hand, is a corporation duly organized and existing under and by virtue of the laws of the Philippines; that on April 10, 1992, MCI and MPI entered into a License Agreement whereby the former granted the latter the following: a) exclusive license to use the "McCormick's Trademarks", b) exclusive license to use such know-how, technology and other confidential information, and c) such technical assistance as may be necessary to enable MPI to manufacture the licensed products; that in consideration of the aforementioned grants, MPI will pay MCI technical assistance fees equivalent to $350 per day for each hour of assistance provided by MCI to MPI in excess of 10 days of assistance per year during the term of the Agreement, and license fees, as defined in Section 2(b) of the Agreement. Based on the foregoing, it is your opinion that under Article 13 of the RP-US tax treaty which 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) . . . (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) "xxx xxx xxx" and considering that the lowest rate given to a third State is 15% as provided in Article 12(2) of the RP-Denmark tax treaty which 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 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. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this limitation. "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 information concerning industrial, commercial or scientific experience, and for the use of, or the right to use, industrial, commercial or scientific equipment in connection therewith. "xxx xxx xxx" the royalty payments made by MPI to MCI under the aforementioned License Agreement shall be subject to the withholding tax rate of 15% pursuant to the most-favored-nation clause of the RP-US tax treaty in relation to the RP-Denmark tax treaty. In reply, please be informed that under the above-quoted Article 13(2)(b)(iii) of the RP-US tax treaty, otherwise known as the most-favored-nation clause, the tax imposable 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. Corollary thereto, the RP-US and RP-Denmark tax treaties, particularly their provisions on the avoidance of double taxation, show 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, this Office confirms your opinion and so holds that the royalty payments to MCI are subject to the withholding tax at the rate of 15% pursuant to the most-favored-nation clause provision of the RP-US tax treaty in relation to the RP-Denmark tax treaty. (BIR Ruling No. ITAD-123-00) Moreover, the said royalty payments shall be subject to the 10% value-added tax (VAT) under Section 108(A)(1) and (3) of the Tax Code, as implemented by Section 4.102-1(b) of Revenue Regulation No. 7-95, viz: " 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 ." Accordingly, MPI shall be responsible for the withholding of income tax at the rate of 15% of the gross amount of royalties and the value-added tax at the rate of 10% of the contract amount. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group