ITAD Ruling No. 126-01

December 19, 2001 ITAD RULING NO. 126-01 Article 13-RP-US tax treaty Articles 12-RP Netherlands tax treaty BIR Ruling No. ITAD-151-00 Quisumbing & Torres Law Offices 11th Floor, Pacific Star Building Makati Avenue cor. Sen. Gil Puyat Ave. Makati City Attention: Atty. Jose R. Sandejas Gentlemen : This refers to your application for tax treaty relief dated December 12, 2000 on behalf of your clients, The Pillsbury Company (TPC) and Haagen-Dazs (HD), a Division of The Pillsbury Company, requesting confirmation of your opinion that royalties paid to them by HD Marketing & Distribution (Philippines), Inc (HDMD) are subject to the 15% final withholding tax pursuant to the "most-favored nation" clause of the RP-US tax treaty in relation to the RP-Netherlands tax treaty. It is represented that both TPC and HD are non-resident foreign corporations organized and existing under the laws of the State of Delaware, United States of America, with principal office at 200 South Sixth Street, Minneapolis, Minnesota; that neither TPC nor HD are registered either as a corporation or as a partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated June 6, 2001; that TPC is the owner of the trademark "Haagen-Dazs" (Licensed Trademark) in several countries around the world, including, the Philippines; that TPC licensed HD the right to use the Licensed Trademark in connection with the manufacture and sale of certain products; that HD has developed a unique and successful system for selling the Products ("System") through the operation of retail establishments known as Haagen Dazs Shops ("Shops"); that on June 7, 1996, TPC and HD entered into a Trademark License and Distribution Agreement ("TLDA") with HD Marketing & Distribution (Philippine), Inc., ("HDMD"), a corporation organized and existing under Philippine laws; that under the TLDA, HDMD is granted the exclusive license to import, franchise, sub-franchise, market and sell at wholesale within the Philippines the Products under the Licensed Trademark and to obtain from TPC technical know-how and information and assistance relating to the marketing, franchising and sale of the Products; that in consideration for this exclusive license, HDMD will pay TPC and HD a fee of US$200,000; also on the same date, HD and HDMD entered into a Master Franchise Agreement ("MFA") whereby HDMD is granted the exclusive right to use the System in the operation of the Shops, and/or to grant sub-franchises in accordance with existing Philippine laws; that pursuant to the MFA, HDMD will pay HD the following: (i) fee of US$200,000; (ii) franchise fee for each Shop of US$20,000 or US$10,000; and (iii) royalty and technical assistance fee of 3% of gross sales; that the TLDA and the MFA have been registered with the Technology and Transfer Registry of the Bureau of Patents, Trademarks and Technology Transfer under Certificate of Registration No. 1852. In reply, please be informed that the "most favored nation" clause provision of the RP-US tax treaty, found in Article 13(2)(b)(iii) thereof, reads, viz : "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) . . . (b) In the case of the Philippines, the least of: (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 (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 . (Emphasis supplied) (c) 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 films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term "royalties" also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. xxx xxx xxx The above-cited "most-favored nation" clause of the RP-US tax treaty speaks of 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," which purpose is to grant to the Contracting State treatment no less favorable than that which has been or may be granted to the "most favored" among other countries. CcAITa Relative thereto, Article 12(2)(b) of the RP-Netherlands tax treaty provides: "Article 12 ROYALTIES "1. Royalties arising in one of the Contracting 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. xxx xxx xxx" 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. A perusal of the RP-US and RP-Netherlands tax treaty provisions on the elimination of double taxation shows 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. Such being the case, the royalties payable by HD Marketing & Distribution (Philippines) to The Pillsbury Company and Haagen-Dazs, under their Trademark License and Distribution Agreement ("TLDA") and Master Franchise Agreement ("MFA") are subject to Philippine tax at the rate of fifteen percent (15%), in accordance with Article 12(2)(b) of the RP-Netherlands tax treaty, in relation to Article 13(2)(b)(iii) of the RP-US tax treaty. (BIR Ruling No. ITAD-151-00, October 23, 2000) Furthermore, under Section 108 of the Tax Code of 1997, the royalty payments to be remitted by HD Marketing & Distribution (Philippines) are subject to the ten percent (10%) value added tax. Section 4.102-1(b) of Revenue Regulations No. 7-95 provides that: " The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600-Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee. " In view of all the foregoing, HD Marketing & Distribution (Philippines) shall be responsible for the withholding of income tax at the rate of 15% of the gross amount of royalties and the value-added tax at the rate of 10% of the contract amount. This ruling is issued on the basis of the foregoing facts as represented. However, 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