ITAD Ruling No. 147-04

December 17, 2004 ITAD RULING NO. 147-04 Article 13, Philippines-France tax treaty BIR Ruling No. DA-ITAD-092-02 Bureau Veritas Consumer Products Services (Phils.) Inc . 8439 South Super Hi-way West Marcelo Green Village Paraaque City 1700 Attention: Jarence Minh A. Relloso Accounts & Finance Division Gentlemen : This refers to your letter dated August 31, 2004 requesting confirmation of your opinion that the royalties paid by your company, Bureau Veritas Consumer Products Services (Phils.) Inc. (Bureau Veritas Phil), to Bureau Veritas Socit Anonyme Directoire et Conseil de Surveillance (Bureau Veritas France) are subject to the preferential tax rate accorded under the Philippines-France tax treaty. It is represented that Bureau Veritas France is a nonresident foreign corporation duly organized and existing under the laws of France with principal office address at 17 bis Place des Reflets, La Dfense 2, Courbevoie, France; 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 September 13, 2004; that Bureau Veritas Phil is a domestic corporation duly organized and existing under Philippine laws; that on February 3, 2004; Bureau Veritas France and Bureau Veritas Phil entered into a BVSA Royalty Agreement (Agreement) whereby the former grants the latter the right to present itself as being a part of the Bureau Veritas worldwide organization and to accordingly use the name "Bureau Veritas"; that in consideration for the aforementioned rights, Bureau Veritas Phil agrees to pay royalties to Bureau Veritas France in a lump sum amount defined and approved by both parties to the Agreement in January of each year; that said royalty amount shall be invoiced once a year, in the 1st of June, and shall be paid on the 15th of July by bank transfer to Bureau Veritas France; and that the BVSA Royalty Agreement complies with the provisions of the Intellectual Property Code on Voluntary Licensing under Certificate of Compliance No. 5-2004-00062 issued by the Intellectual Property Office (IPO) on August 20, 2004. In reply, please be informed that Article 12 of the Philippines-France tax treaty provides as follows: "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. SEcTHA "2. However, such royalties may be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall, provided that the royalties are taxable in the other Contracting State, not exceed: "a) in the case of the Philippines, 15 per cent of the gross amount of the royalties (i) paid by an enterprise registered with the Philippines Board of Investments and engaged in preferred areas of activities, or (ii) paid in respect of cinematographic films or of works recorded for broadcasting or television; "b) in all other cases, 25 per cent of the gross amount of the royalties. "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 and works recorded for broadcasting or television, any patent, trade mark, 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" Article 6 of the superseding Protocol of the same treaty amending certain provisions thereof deleted and replaced Article 12(2) above and reads, viz : "Article 6 "Paragraph 2 of Article 12 of the Convention is deleted and replaced by the following: "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 beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 15 percent of the gross amount of the royalties." Accordingly, since Bureau Veritas France is the beneficial owner of the royalty payments, this Office is of the opinion and so holds that the royalty payments by Bureau Veritas Phil to Bureau Veritas France are subject to the preferential tax rate of 15 percent pursuant to Article 12(2) as amended by Article 6 of the Protocol of the Philippines-France tax treaty. (BIR Ruling No. ITAD-92-02 dated May 16, 2002) Moreover, the royalty payments are subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Bureau Veritas Phil being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT before making any payment to Bureau Veritas France. In remitting the VAT withheld, Bureau Veritas Phil 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 Bureau Veritas Phil upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Bureau Veritas Phil is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as "expense" or "asset," whichever is applicable. In addition, Bureau Veritas Phil is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of Bureau Veritas France, the first three copies thereof to be given to Bureau Veritas France and the fourth copy to be retained by Bureau Veritas Phil as its file copy. [Section 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] IaTSED This ruling is issued on the basis of 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service