ITAD Ruling No. 121-00

August 29, 2000 ITAD RULING NO. 121-00 Art. 13, RP-US Art. 12, RP-Russia Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City, Philippines Attention: Joel L . Tan-Torres Partner, Tax Division Gentlemen : This refers to your letter dated January 18, 2000 requesting for confirmation of your opinion that the royalties paid by your client, S. C. Johnson & Son, Inc. (SCJ) to S. C. Johnson and Son, United States of America (SCJ-USA), is subject to tax at a rate of 15 percent pursuant to the "most favored nation" clause of the RP-US Tax Treaty in relation to RP-Russia Tax Treaty. cAECST It is represented that SCJ-USA is a non-resident foreign corporation duly organized and existing under the laws of the United States of America;-that it is not registered as a corporation/partnership in the Philippines as per Securities and Exchange Commission certification issued February 15, 2000; that SCJ is a corporation duly organized and existing under Philippine Laws; that on July 4, 1998, SCJ entered into a Licensing Agreement with SCJ-USA, whereby SCJ was granted the right to use the trademark, patents and technology owned by SCJ-USA which includes the right to manufacture, package and distribute products covered by the agreement and secure assistance in management, marketing and production from SCJ-USA; that in consideration of the aforementioned rights licensed to SCJ, SCJ shall pay SCJ-USA a royalty of four percent of the former's net sales on the products covered by the agreement; that the Licensing Agreement complies with the provisions of the Intellectual Property Code as evidenced by the Certification of Compliance No. 5-1998-00074 dated November 6, 1998 issued by the Intellectual Property Office (IPO); that SCJ had earlier subjected its royalty payments to 10 percent withholding tax on royalties pursuant to the most favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. In reply, please be informed that under the "most favored nation" clause provision of the RP-US Tax Treaty [Article 13, paragraph (2) (b) III], 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. Article 12, paragraph 2 of the RP-Russia Tax Treaty provides that royalties arising from the Philippines and paid to a resident of Russia may also be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of royalties. The term "royalties" as used in this Article means any payment of any kind received as a consideration for the use of, or right to use, any patent, trademark, design or model, secret formula or process, or for the use of, or the right to use of, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 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. Thus, anent the most favored nation clause, U.S. recipients of royalty income are not entitled to the lower rate of 10 percent enjoyed by the German recipients under the RP-West Germany Tax Treaty because it was held that there is no payment under similar circumstance. Moreover, the aforementioned decision and its doctrine shall be applied prospectively (BIR Ruling No. 163-99 dated October 20, 1999). A perusal of the RP-US and RP-Russia Tax Treaties particularly their provisions on the avoidance of double taxation show that there is 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. TSHIDa Such being the case, your opinion that the royalties paid by S.C Johnson and Son, Inc. to S.C. Johnson and Son, United States of America is subject to tax at the rate of 15 percent pursuant to the "most favored nation" provision of the RP-US Tax Treaty in relation to RP-Russia Treaty is hereby confirmed. Moreover, the said royalties based on the net sales shall be subject to 10 percent value added tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code of 1997. SCJ shall, before making payment of royalties to SCJ-USA, withhold and remit to this Bureau the said 10 percent VAT due thereon by filing a separate VAT return for and on behalf of SCJ-USA. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit (Section 4.110-3(b) of Revenue Regulations No. 7-95). In fine, the royalties paid by S.C. Johnson and Son, Inc. (SCJ) to S.C. Johnson and Son, United States of America (SCJ-USA) is subject to tax at the rate of 15 per cent. Furthermore, SCJ shall, on behalf of SCJ-USA, withhold the 10 percent VAT due by filing a separate VAT return for SCJ-USA using BIR Form No. 1600. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue