ITAD Ruling No. 125-04

November 8, 2004 ITAD RULING NO. 125-04 Art. 12, RP-Netherlands tax treaty Sec. 20 (B) (1) of NIRC of 1997 Sec 108 of NIRC of 1997 BIR Ruling No. 026-94 BIR Ruling No. 198-85 BIR Ruling No. DA-476-99 Gulf Oil Philippines, Inc. 39 M. Lozada Street Brgy. Sto. Rosario, Silangan Pateros, Metro Manila Attention: Ramaswamy Varadarajan General Manager Gentlemen : This refers to your application for relief from double taxation dated July 13, 2004, requesting for a 10% preferential tax rate on the royalty payments relative to a Licensing and Technical Assistance Agreement executed between Gulf Oil Philippines, Inc. (Gulf-Phil) and Gulf Oil Benelux BV (Gulf-Netherlands) pursuant to the Philippines-Netherlands tax treaty. It is represented that Gulf-Netherlands is a wholly owned subsidiary of Gulf Oil International Limited (Gulf); that it is a corporation organized and existing under the laws of the Netherlands with principal address at GOI Services Ltd., 3rd Floor 16 Charles, II Street, London SWIY 4QU; 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 December 9, 2003; that Gulf-Philippines is a BOI-registered corporation organized and existing under the laws of the Philippines with principal address at #39 M. Lozada St., Brgy., Sto. Rosario Silangan, Pateros, Metro Manila; that Gulf is internationally known as a producer, manufacturer and marketer of petroleum products and specialties, including automotive and industrial lubricants and technical and industrial oils and has the right to license the use of certain internationally known and advertised trademarks; that Gulf-Netherlands has the right to license the use of certain colour arrangement, designs and indicia used on labels and packages and containers which identify the Gulf Trademarks and goodwill; that on April 1, 2003, Gulf-Netherlands and Gulf-Philippines entered into a Licensing and Technical Assistance Agreement (Agreement) whereby Gulf-Phil shall obtain a license and authorization to use Gulf Trademarks and Gulf Indicia from Gulf-Netherlands; that under the same Agreement, Gulf-Netherlands or its nominee shall provide Gulf-Phil technical advice and services required in connection with the company's lubricant business; that the said technical assistance covered under the Agreement were performed by Gulf-Netherlands outside the Philippines per certification issued by Gulf-Philippines dated September 13, 2004; that in consideration thereof, Gulf-Philippines shall pay Gulf-Netherlands a royalty of 4% of net sales plus technical fee of US$60,000.00, to be billed annually. In reply please be informed that Article 12 of the Philippines-Netherlands tax treaty provides, viz : "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 percent 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 percent of the gross amount of the royalties in all other cases. "3. . . . "4. 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 cinematograph films or tapes for radio or television broadcasting, any patent, trademark, 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 above royalties arising in the Philippines and paid to a resident of the Netherlands who is the beneficial owner thereof may be subject to Philippine income tax at a rate not to exceed 10 percent of the gross amount of the royalties where such royalties are paid by an enterprise registered and engaged in preferred areas of activities, or 15 percent of the gross amount of the royalties in all other cases. AIECSD Such being the case, since Gulf-Phil is a BOI-registered enterprise on a non-pioneer preferred status, the payments made by Gulf-Phil to Gulf-Netherlands shall be subject to the preferential tax rate of ten percent (10%), based on the gross amount of the royalties. (BIR Ruling No. 026-94 dated January 21, 1994 and BIR Ruling No. 198-85 dated November 7, 1985) Moreover, royalty payments made by Gulf-Philippines to Gulf-Netherlands under the Agreement are subject to the 10% value-added tax under Sec. 108 of the Tax Code of 1997. Accordingly, Gulf Philippines, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of 10% VAT before remitting any payment to Gulf-Netherlands. In remitting the VAT withheld, Gulf-Philippines 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 Gulf-Philippines upon filing its own VAT, if it is a VAT-registered taxpayer. In case Gulf-Philippines 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 "expense" or "asset" whichever is applicable. In addition, Gulf-Philippines is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of Gulf-Netherlands, the first three copies thereof to be given to Gulf-Netherlands and the fourth copy to be retained by Gulf-Philippines as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] Thus, Gulf-Philippines shall be responsible for the withholding of the 10% VAT and income tax at the rate of 10% of the gross amount of royalties. However, as regards the payment for the technical services, Section 28(B)(1), in relation to Section 42(A)(3) of the Tax Code of 1997 provides as follows: "(B) Tax on Nonresident Foreign Corporation . "(l) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines , such as interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5(c): Provided , That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied) "xxx xxx xxx" SEC. 42. Income from Sources Within the Philippines . "(A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: "xxx xxx xxx" "(3) Services. Compensation for labor or personal services performed in the Philippines; "xxx xxx xxx" It is clear from the aforequoted provisions that a nonresident foreign corporation is taxable only on income derived from sources within the Philippines. The source of the income derived from services is the place where the services are rendered so that if the nonresident foreign corporation furnishes and performs services in the Philippines, the compensation therefore are taxable in the Philippines. In the instant case, based on your representation that the services are rendered entirely in Netherlands, the fees to be paid are considered income derived from sources outside the Philippines. In view thereof, this Office is of the opinion and so holds that since technical services covered by the subject Licensing and Technical Service Agreement are to be rendered by Gulf-Netherlands outside the Philippines, and are considered income from sources without the Philippines, the payments made by Gulf-Philippines to Gulf-Netherlands for said services shall not be subject to Philippine income tax and consequently to the withholding tax under Section 28(B)(1) of the Tax Code of 1997. (BIR Ruling No. DA-076-99 dated February dated February 8, 1999) This ruling is issued based on 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. DSCIEa Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service