ITAD Ruling No. 116-05

October 10, 2005 ITAD RULING NO. 116-05 Article 12, Philippines-Netherlands Tax Treaty BIR Ruling No. DA-ITAD-100-03 Wordtext Systems, Inc . 7/F SEDCCO 1 Building Legaspi cor. Rada Sts., Legaspi Village, Makati City Attention: Ms. Remedies L. Chua Vice-President/Finance Gentlemen : This refers to your letter dated January 12, 2005, requesting the availment of the 15% tax treaty rate on royalties arising from payments made by Wordtext Systems, Inc. (Wordtext) to Macromedia Netherlands B.V. (Macromedia), pursuant to Article 12 paragraph 2(b) of the Philippines-Netherlands tax treaty. It is represented that Macromedia is a nonresident foreign corporation with office address at Zonnebaan 45, 3542 EB Utrecht, The Netherlands and is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, as certified in the Declaration of Residence dated June 15, 2004 issued by the Tax and Customs Administration of The Netherlands; that it is not registered either as a corporation or as a partnership licensed to engage in trade or business in the Philippines per certification issued by the Securities and Exchange Commission dated January 5, 2005; that Wordtext is a corporation organized and existing under the laws of the Philippines with principal address at 7/F SEDCCO 1 Building, Legaspi corner Rada Sts., Legaspi Village, Makati City; that on August 19, 2004, Macromedia and Wordtext entered into an International Software Distribution Agreement (Agreement) wherein Wordtext was licensed by Macromedia as its non-exclusive distributor of the latter's software products (Products) in the Philippines; that under the Agreement, Wordtext may distribute the Products only in the Philippines solely through retail dealers located and taking delivery of Products within the Philippines, which retail dealers shall license the use of the Products only under the terms and conditions of the End-user Software License Agreement supplied with the Products, and that Macromedia and Wordtext are each independent entities and neither party shall be, nor represent itself to be, a franchisor, franchisee, joint venturer, partner, master, servant, principal, agent or legal representative of the other party for any purpose whatsoever; that Macromedia will charge Wordtext for the products according to its price list in effect at the time of the order, the price list will be amended upon the addition or discontinuance of Products or revision of prices for Products, and that the Agreement shall be effective as of August 19, 2004 and shall continue to be in force until terminated by either party. EAaHTI In reply, please be informed that Article 12 of the Philippines-Netherlands tax treaty provides that: "Article 12 "Royalties" "1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. "2. However, such royalties may also be taxed in the 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: "a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and "b) 15 per cent of the gross amount of the royalties in all other cases. "xxx xxx xxx" Based on the abovecited provisions, royalties arising from sources within the Philippines and derived by a resident of the Netherlands shall be subject to the following preferential tax rates: (a) a rate not exceeding 10 percent of the gross amount of the royalties, where the royalties are paid by an enterprise registered and engaged in preferred areas of activities and (b) 15 percent of the gross amount of the royalties in all other cases. Such being the case, and since Wordtext is not a corporation registered with the Philippine Board of Investments which is engaged in preferred areas of activities, this Office is of the opinion and so holds that the royalty fees paid by Wordtext to Macromedia pursuant to their International Software Distribution Agreement shall be subject to income tax at a rate of 15 percent, based on the gross amount thereof. (BIR Ruling No. DA-ITAD-100-03 dated July 16, 2003) Finally, the said royalty fees by Wordtext to Macromedia are subject to the 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Wordtext, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% VAT on such royalty fees before remitting any payment to Macromedia. In remitting the VAT withheld, Wordtext shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Wordtext upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case Wordtext 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 an "expense" or an "asset", whichever is applicable. In addition, Wordtext is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to Macromedia upon its request and the fourth copy to be retained by Wordtext as its file copy. [Section 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 14-2002] ECaAHS 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 without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service