ITAD Ruling No. 151-00

October 23, 2000 ITAD RULING NO. 151-00 Art. 13. RP-US Art. 12, RP-Netherlands ITAD 54 00 Colgate-Palmolive Philippines, Inc. 1049 Jose Rizal Avenue 0701 Makati City Attention: Aniceto Y . Dideles Legal Director & Corporate Secretary Gentlemen : This refers to your letter dated July 6, 2000 requesting to avail of the preferential tax rate of 15% final withholding tax on your royalty payments due to your parent company, Colgate-Palmolive Company, pursuant to the RP-USA Tax Treaty. It is represented that Colgate-Palmolive Company (Colgate USA) is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal office at 300 Park Avenue, New York, New York; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated May 4, 2000; that Colgate-Palmolive Philippines, Inc. (Colgate Phil) is a corporation duly organized and existing under Philippine Laws; that Colgate Phil. is a wholly owned subsidiary of Colgate USA; that on several dates, Colgate USA and Colgate Phil. executed the following royalty agreements, all with a uniform ten-year term and duly registered with the Intellectual Property Office (IPO): Certificate of Registration (COR) No./ Certificate of Compliance (COC) No. Effective Until COR No. 1472 March 15, 2003 COR No. 1593 May 14, 2004 COR No. 1813 April 1, 2006 COR No. 1919 December 31, 2006 COR No. 1962 April 30, 2007 COC No. 5-1999-00010 December 31, 2008 COC No. 5-2000-00021 December 31, 2009 Moreover, it is also represented that your Office will remit to Colgate USA the amount of P20,628,512.00 as royalties based on a percentage of net sales; and that you are subjecting the same to a preferential tax rate of 15 per cent pursuant to the "most favored nation" clause of the RP-US Tax Treaty in relation to the RP-Netherlands Tax Treaty. 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. cSCTID "(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 the 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" On the other hand, 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. ECaScD 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 royalties in all other cases. xxx xxx xxx" Based on the foregoing, 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. The royalties arising from the Philippines and paid to a resident of the Netherlands may also be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of royalties in cases other than royalties paid by an enterprise registered in preferred areas of activities in the Philippines. The term "royalties" as used in this Article means any payment of any kind received as a consideration for the use of, or right to use, any patent, trademark, design or model, secret formula or process, or for the use of, or the right to use of, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 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 and not to the subject matter of the tax which is royalties. Hence, the "most favored nation" clause of the RP-US Tax Treaty must be interpreted not only in relation to Article 12 of the RP-Netherlands Tax Treaty but also in connection with the provisions on the elimination of double taxation of both the RP-US Tax Treaty and RP-Netherlands Tax Treaty. A perusal of the RP-US and RP-Netherlands Tax Treaties, particularly their provisions on the avoidance of double taxation, show that there is 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 and since Colgate Phil. is not registered and engaged in preferred areas of activities in the Philippines, your application is hereby approved. The royalties paid by Colgate-Palmolive Philippines (Colgate Phil) to Colgate-Palmolive Company (Colgate USA) is subject to the preferential tax rate not to exceed 15% of the gross amount of royalties pursuant to the "most favored nation" provision of the RP-US Tax Treaty in relation to RP-Netherlands Treaty. (ITAD Ruling No. 54-00 dated March 7, 2000) DSATCI Finally, the said royalties based on the net sales shall be subject to 10 percent value added tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code of 1997. Colgate Phil, shall, before making payment of royalties to Colgate USA, withhold and remit to this Bureau the said 10 percent VAT due thereon by filing a separate VAT return for and on behalf of Colgate USA using BIR Form No. 1600. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit. (Section 4.110-3(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 will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group