ITAD Ruling No. 142-03

September 23, 2003 ITAD RULING NO. 142-03 RP-US, Arts. 13 (2) (b) (iii) RP-China Art. 12 (2) (b) NIRC, Sec. 108; RMC 46-2002 BIR Ruling No. DA-ITAD 110-03 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated February 27, 2003, on behalf of your client, Wrigley Philippines, Inc. (WPI), requesting confirmation that the royalty payments of WPI to Wm. Wrigley Jr. Company (Wrigley-US) are subject to the withholding tax rate of ten percent (10%) pursuant to the "most-favored-nation" clause of the RP-US tax treaty in relation to the RP-China tax treaty. It is represented that Wrigley-US is a non-resident foreign corporation duly organized and existing under the laws of the State of Delaware, USA, with business address at 410 North Michigan Avenue, Chicago, Illinois, USA; that Wrigley-US is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated February 10, 2003; that WPI is a corporation duly organized and existing under the laws of the Philippines with business address at Marcos Highway, Sitio Puting Bato, Barangay Inarawan, Antipolo City; that WPI and Wrigley-US entered into a License Agreement which was registered with the Bureau of Patents, Trademark and Technology Transfer (now the Intellectual Property Office) on July 23, 1993 under Certificate of Registration No. 1433 valid from July 1, 1993 to June 30, 2003, whereby the latter granted the former the following rights: 1) License to manufacture and sell chewing gum under the technical data acquired and developed by Wrigley-US, consisting principally of formulae, written descriptions, blue prints, manufacturing processes, inventions and methods with respect to the manufacture of chewing gums; 2) Information to all developments or improvements relating to the manufacture of chewing gum; 3) Technical assistance by communicating and interpreting techniques that may be developed with respect to the marketing, selling, advertising, manufacturing and packaging of chewing gum; and 4) Exclusive right to manufacture, use, and sell in the Philippines under Wrigley-US trademarks; that pursuant to the provisions of the License Agreement and in accordance with the provisions of the RP-US tax treaty, royalty payments by WPI to Wrigley-US have been subject to 15% withholding tax rate, applying the "most-favored-nation" clause found in the RP-US tax treaty, in relation to the pertinent provisions of the RP-Russia, RP-Denmark, or RP-Sweden tax treaties, notwithstanding the effectivity of the RP-China tax treaty on January 1, 2002. In reply, please be informed that Article 13 of the RP-US tax treaty provides, 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) In the case of the United States, 15 percent of the gross amount of the royalties, and (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) "(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 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" and, in relation thereto, Article 12 of the RP-China tax treaty provides, viz : "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 laws of that State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) 15 percent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or b) 10 percent of the gross amount of the royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. "xxx xxx xxx" Based on the above-mentioned provisions, 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. Relative thereto, it is noteworthy that under Article 12(2)(b) of the RP-China tax treaty, the tax charged shall not exceed 10% of the gross amount of royalties. In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals, G.R.N. 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. (BIR Ruling No. ITAD 118-01 dated February 23, 2001 and BIR Ruling No. ITAD 109-02 dated May 30, 2002) Such being the case, this Office is of the opinion and so holds that the royalty payments of WPI to Wrigley-US under the License Agreement are subject to final withholding tax at the rate of 10% pursuant to the "most favored nation" provision of the RP-US tax treaty in relation to the RP-China tax treaty effective January 1, 2002. [Revenue Memorandum Circular (RMC) No. 46-2002 dated September 2, 2002; BIR Ruling No. DA-ITAD 101-03 dated July 24, 2003] WPI shall deduct and withhold the tax at the time the royalty income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, and whichever comes first. The term "payable" refers to the date the obligation become due, demandable, or legally enforceable. [Section 4-Time of Withholding, Revenue Regulations No. 12-2001] Moreover, the said royalty payment by WPI to Wrigley-US shall be subject to the 10% value-added tax (VAT) under Section 108 of the Tax Code. Accordingly, WPI, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT on such royalty before making any payment to Wrigley-US. In remitting the VAT withheld, WPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by WPI upon filing its own VAT return, if it is a VAT-registered taxpayer. In case WPI is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the service purchased which may be treated as "expense" or "asset", whichever is applicable. In addition, WPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of Wrigley-US, the first three copies thereof to be given to Wrigley-US and the fourth copy to be retained by WPI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3, RR8-2002; Section 7, RR14-2002] This ruling is issued on the basis of the facts as represented and is rendered only for the purpose of determining whether Wrigley is entitled to the benefits of the RP-US tax treaty. The determination on whether your request for tax refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including copy of this ruling) shall be endorsed to the proper office for processing and investigation. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service