ITAD Ruling No. 116-01

November 29, 2001 ITAD RULING NO. 116-01 RP-US/RP-Denmark Article 13/12 BIR Ruling No. ITAD-25-01 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Mr. Vic C. Mamalateo Tax Partner Gentlemen : This refers to your letter dated May 30, 2000, on behalf of Swift Textiles, Inc. (Swift), requesting for confirmation of your opinion that the tax rate for the royalty payments made by Litton Mills, Inc. (Litton) to Swift is 15% pursuant to Article 13 of the RP-US Tax Treaty. It is represented that Swift is a non-resident foreign corporation organized and existing under the laws of the United States of America engaged in the production of denim and denim-related products, with office address at Five Concourse, Parkway, Suite 2300, Atlanta, GA 30328; that Litton is a domestic corporation with office address at Bo. Rosario, Pasig City, 1609 Philippines, registered with the Board of Investment as an expanding producer of woven fabrics which is a preferred area of activity on a non-pioneer status under Certificate of Registration No. EP 94-641 issued on December 29, 1994 and BOI certification dated October 4, 2001; that Swift is neither registered nor licensed to do business in the Philippines as a corporation or partnership per Securities and Exchange Commission certification dated October 24, 2000; that Swift entered into a Technical Assistance and Licensing Agreement (TALA) and Marketing and Sales Agreement (MSA) with Litton; that both agreements were covered by a Certificate of Compliance No. 5-1999-00078 issued on September 8, 1999 with 10 years validity by the Intellectual Property Office of the Department of Trade and Industry; that under the TALA, Swift granted Litton the exclusive right to use the denim technology within the Philippines and has also provided Litton with technical services that will enable Litton to utilize the denim technology subject to the payment of royalty; that, on the other hand, Litton is granted under the MSA the exclusive license to use the Swift trademark and Swift's customer lists, marketing, merchandising and distribution know-how and expertise within the Philippines in consideration for the payment of royalty; and that under both agreements, Litton is required to withhold the corresponding tax on the royalty payments. In reply, please be informed that Article 13 of the RP-US Tax Treaty provides: "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: ATcEDS "(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 (emphasis supplied) ''(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. "xxx xxx xxx" Based on the foregoing, royalty payments to a company which is a resident of the United States of America (USA) and which does not have a permanent establishment in the Philippines may be taxed at a preferential tax rate not exceeding fifteen per cent (15%) of the gross amount of royalties if the payor Philippine company is a Board of Investments (BOI) registered enterprise engaged in preferred areas of activities. Such being the case, since Litton Mills, Inc. is a BOI-registered enterprise engaged in preferred areas of activities, the royalty fees paid by Litton to Swift are subject to the preferential tax rate of 15 percent based on the gross amount of royalties pursuant to the RP-US Tax Treaty. (BIR Ruling No. 207-82 dated June 28, 1982) Further, under Section 108(A) of the 1997 Tax Code, the payments to be remitted by Litton to Swift are subject to 10% Value-Added Tax (VAT). Accordingly, Litton shall be responsible for the payment of VAT on behalf of Swift by filing a separate VAT declaration/return using BIR Form 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The said return can be used by Litton as evidence in claiming input tax credit. [Sec. 4.102-1(b), Revenue Regulation No. 7-95] In fine, Litton shall be responsible for the withholding of the income tax at the rate of 15% of the gross amount of the royalties and the value-added tax at the rate of 10% of the contract price. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it shall be discovered 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 and Inspection Group