ITAD Ruling No. 141-00

September 19, 2000 ITAD RULING NO. 141-00 Arts. 12 & 15 UP-Netherlands Secs. 25 (A) & 1080 (A) (3) NIRC 45-99 38-97 Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . Alexander B . Cabrera Partner, Tax Services Gentlemen : This refers to your letter dated June 29, 2000 requesting confirmation of your opinion that fees to be paid by Robinsons Savings Bank ( RSB ) to Silverlake Netherlands B . V .( Silverlake ) under a licensing agreement are royalties subject to the preferential tax rate of fifteen percent (15%) pursuant to Article 12(2)(b) (Royalties) of the RP-Netherlands Tax Treaty. It is represented that Silverlake is a company organized and existing under the laws of the Netherlands with principal office at Officia I, De Boelelaan 7, 1083 HJ Amsterdam, 1008 DE Amsterdam, the Netherlands; that it is not registered as a corporation or partnership in the Philippines as per certification issued by the Securities and Exchange Commission dated May 11, 2000; that RSB is a company organized and existing under the laws of the Philippines with principal office at Level 3, Expansion Mall, Robinsons Galleria, Edsa corner Ortigas Avenue, Quezon City, Philippines; that on August 18, 1999, a Software License Agreement ( the Agreement ) was entered into by and between RSB and Silverlake ;that the Agreement complies with the provisions of the Intellectual Property Code (Republic Act No. 8293) on Voluntary Licensing as per Intellectual Property Office Certificate of Compliance No. 5-2000-00046 dated June 26, 2000; that, under the Agreement , RSB agrees to obtain from Silverlake the Banking Software Package (the Product ) (together with manuals, specifications or other documentation in any printed, machine readable or other form including but not limited to listings, manuals and magnetic media) and Silverlake agrees to supply RSB the same; that, consequently, Silverlake grants RSB a non-exclusive, non-transferable, perpetual license to use the Product solely in the Philippines; that the Product ,specifically, comprises the following software modules: 1. Silverlake Integrated Banking System (SIBS) Modules a. Customer Information System b. Demand Deposit System c. Fixed Deposit System d. Loans System e. Remittance System f. General Ledger System 2. Silverlake Branch Teller System (available up to branches including Head Office) that, in addition to the Product , Silverlake agrees to deliver to RSB the following: a. Year 2000 Compliance Letter specifying that the Product is Y2K Compliant, and that the Product shall be replaced in case it is not Y2K Compliant; TECIaH b. Testing scripts and a representative to assist RSS in checking the capability of the Product to handle special dates and the transition from year 1999 to 2000 and beyond; and c. Board Resolution authorizing the execution and issuance of the documents referred to in item (1) and indicating the authorized signatories with specimen signatures; that, in consideration of the Product to be provided by Silverlake to RSB , RSB agrees to pay to Silverlake the total sum of One Hundred and Ten Thousand United States Dollars (US$110,000.00) which shall be inclusive of value-added tax (VAT);that payments shall be made by RSB to Silverlake as follows: Every quarter for four (4) quarters US$21,390.00 per quarter (April 5, 1999, July 5, 1999, October 5, 1999, and January 5, 2000) When RSB's assets hit 1.5 Billion Pesos US$12,220.00 When RSB's assets hit 2.0 Billion Pesos US$12,220.00 Based on the foregoing, it is your opinion that the license fees to be paid by RSB to Silverlake are royalties and as such are subject to the preferential tax rate of 15 percent pursuant to Article 12(2)(b) (Royalties) of the RP-Netherlands Tax Treaty, and that in addition thereto, the said royalties shall be subject to the 10 percent VAT to be paid by RSB to the Bureau of Internal Revenue on behalf of Silverlake . In reply, please be informed that Article 12 Of the RP-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 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. "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 foregoing, royalties arising in the Philippines and paid to a resident of Netherlands may be subject to Philippine income tax at a rate not to exceed 10 percent of the gross amount of the royalties where such 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, where the recipient is the beneficial owner of the royalties. TAacIE Therefore, since the license fees to be paid by RSB to Silverlake are considered "payments of any kind received as a consideration for the use of, or the right to use information concerning industrial, commercial or scientific experience" and as such are royalties within the meaning of the aforequoted Article, your opinion that the same are subject to the preferential tax rate of 15 percent of the gross amount of royalties is hereby confirmed. (BIR Ruling Nos. 45-99 and 38-97) Moreover, paragraph 2, Article 15 (Dependent Personal Services) of the same Treaty provides: "Article 15 DEPENDENT PERSONAL SERVICES "1. Subject to the provisions of Articles 16, 18, 19 and 20 salaries, wages and other similar remuneration derived by a resident of one of the States in respect of an employment shall be taxable only in that State unless the employment is exercised in the other State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. "2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of one of the States in respect of an employment exercised in the other State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State. "xxx xxx xxx" Thus, the salaries, wages or similar remuneration which a representative of Silverlake may derive in rendering technical assistance to RSB in checking the capability of the Product to handle special dates and transitions from year 1999 to 2000 and beyond, may be exempt from Philippine income tax if all the conditions set forth in the foregoing Article are satisfied. Otherwise, the said income shall be subject to the rate of tax provided for under Section 25(A) of the National Internal Revenue Code of 1997 on a nonresident alien engaged in trade or business within the Philippines. (BIR Ruling Nos. 44-97 and 69-96) Finally, the royalty payments of RSB to Silverlake are subject to 10 percent (10%) VAT imposed under Section 108(A)(3) of the same Code based on the contract price. RSB shall be responsible for the payment of VAT on the royalties on behalf of Silverlake by filing a separate VAT declaration/return using BIR Form 1600. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit. (Section 4.102-1(b) of Revenue Regulations No. 7-95) This ruling is being 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 rendered null and void. EaISTD Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group