ITAD Ruling No. 115-05

October 6, 2005 ITAD RULING NO. 115-05 Article 12 of the Philippines-US and Philippines-China Tax Treaties BIR Ruling No. DA ITAD 186-03 Accountants Global Network 30/F Burgundy Corporate Tower 252 Sen. Gil Puyat Avenue Makati City, Philippines Attention: Mr. Ramon F. Garcia Gentlemen : This refers to your letter dated June 7, 2005, on behalf of your client, American Star Apparel (Phils.), Inc. (ASAPI), requesting confirmation that the royalty payments of ASAPI to Williamson-Dickie Manufacturing Company (WDMC) are subject to the withholding tax rate of ten percent (10%) pursuant to the "most-favored-nation" clause of the Philippines-United States tax treaty in relation to the Philippines-China tax treaty. It is represented that WDMC is a nonresident foreign corporation organized and existing under the laws of United States of America (USA) with principal office address at Fort Worth, Tarrant County, Texas; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 31, 2004; that ASAPI is a corporation organized and existing under the laws of the Philippines with principal address at 25 La Felonila Street, Barangay Damayang Lagi, New Manila, Quezon City 1100; that on July 1, 2000, ASAPI and WDMC entered into a License Agreement whereby WDMC, as licensor, agreed to and granted to ASAPI, as licensee, the exclusive right and license to use the trademark "Dickies and Horseshoe Design" in the Republic of the Philippines, in the design, manufacture, advertising, and sale of The Licensed Products in ASAPI's "Channel of Trade" 1 in compliance with the guidelines for presentation, advertising, and marketing of Licensed Products promulgated by WDMC from time to time during the term thereof; that the Agreement shall be for a period of three (3) years and six (6) months commencing on July 1, 2000, and ending on December 31, 2003 (the "Initial Term"); that ASAPI agrees to pay as earned royalties for ASAPI's use of the Trademark a sum equal to five percent (5%) of ASAPI's Net Shipments of Licensed Products each Contract Year; and that the mark "Dickies and Horseshoe Design" was registered to WDMC with the Philippine Intellectual Property Office under Registration No. 4-2001-008979 on December 15, 2003, for a period of ten (10) years from said registration date unless sooner cancelled in accordance with law and regulations. cDEICH In reply, please be informed that Article 13 of the Philippines-United States 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, at 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) 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" and, in relation thereto, Article 12 of the Philippines-China 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 laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed; TADcCS (a) 15 percent 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 (Emphasis supplied). xxx xxx xxx" Pursuant to the aforequoted "most-favored-nation" clause under Article 13(2)(b)(iii) of the Philippines-United States 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 Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. Relative thereto, Article 12(2)(b) of the Philippines-China tax treaty, provides that the tax charged on 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" shall not exceed 10% of the gross amount of royalties. It is noteworthy that 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. (BIR Ruling No. DA-ITAD 186-03 dated December 1, 2003) A plain reading of the Philippines-United States and the Philippines-China tax treaty provisions on the avoidance of double taxation shows a similarity on the manner of payment of the taxes, that is, the allowable foreign tax credit in both treaties is the amount actually paid in the Philippines. Such being the case, this Office is of the opinion and so holds that the royalty payments of ASAPI to WDMC under their License Agreement shall be subject to the tax rate of ten percent (10%), based on the gross amount thereof, pursuant to Article 13(2)(b)(iii) of the Philippines-United States tax treaty in relation to Article 12(2)(b) of the Philippines-China tax treaty. (Revenue Memorandum Circular (RMC) No. 46-2002 dated September 2, 2002) (BIR Ruling No. DA-ITAD 186-03 dated December 1, 2003.) Moreover, the said royalty payments to be paid by ASAPI to WDMC are subject to the 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, ASAPI, being the resident withholding agent and the payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such royalty before making any payment to WDMC. In remitting the VAT withheld, ASAPI 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 the proof of payment thereof shall serve as documentary substantiation for the claim of input tax by ASAPI upon filing its own VAT return, if it is a VAT-registered taxpayer. In case ASAPI is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the goods or properties purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, ASAPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of WDMC, the first three copies thereof to be given to WDMC. and the fourth copy to be retained by ASAPI as its file copy. [Section 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 14-2002] HCIaDT 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 Legal Service Footnotes 1. "LICENSEE'S Channel of Trade" shall mean the sale or offer of sale of the Licensed Products at wholesale to jeans and sportswear shops, specialty stores, boutiques, and department stores for retail sale to consumers in the fashion market.