ITAD Ruling No. 117-05

October 10, 2005 ITAD RULING NO. 117-05 Article 12, Philippines-Singapore tax treaty BIR Ruling No. DA-ITAD-108-03 Wordtext Systems, Inc. 7/F SEDCCO I Building Legaspi cor. Rada Sts., Legaspi Village, Makati City Attention: Ms. Remedies L. Chua Vice President-Finance Gentlemen : This refers to your letter dated August 17, 2004, requesting the availment of the 25% tax treaty rate on royalties arising from payments made by Wordtext Systems Inc. (Wordtext) to IBM Singapore Pte. Ltd. (IBM), under an Agreement authorizing Wordtext as a remarketer of workstation software which includes programs and services from IBM, pursuant to the Philippines-Singapore tax treaty. It is represented that IBM is a nonresident foreign corporation with address at #9 Changi Business Park, Central 1, Singapore 486048 and is certified by the Inland Revenue Authority of Singapore as a resident of Singapore for income tax purposes for the years 2004 and 2005; 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 August 20, 2004; 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 September 5, 2003, IBM and Wordtext entered into a Business Partner Agreement (Agreement) wherein Wordtext was approved by IBM as a remarketer of workstation software which includes Programs and Services from the IBM Corporation; and that the amounts payable for each Program and Software are due upon receipt of invoice and payable as specified in a transaction. In reply, please be informed that Article 12 of the Philippines-Singapore tax treaty provides that: "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 law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: DEScaT "a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; "b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; "c) in all other cases, 25 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 or tapes for television or broadcasting, any patent, trade mark, 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" Based on the abovecited provisions, royalties arising from sources within the Philippines and derived by a resident of Singapore shall be subject to the following preferential tax rates: (a) a rate not exceeding 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; (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; or (c) in all other cases, a rate not to exceed 25 percent of the gross amount of the royalties. 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 fees paid by Wordtext to IBM pursuant to their Agreement, being royalties, shall be subject to income tax at a rate of 25 percent, based on the gross amount thereof. (BIR Ruling No. DA-ITAD-108-03 dated July 29, 2003) Finally, the said royalty fees by Wordtext to IBM 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 IBM. 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 IBM 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. 8-2002; Section 7 of RR No. 14-2002]. 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. IDcTEA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service