ITAD Ruling No. 153-04

December 20, 2004 ITAD RULING NO. 153-04 Art. 12 of Philippines-Singapore tax treaty RMC No. 77-2003 BIR Ruling No. ITAD-14-04 Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West, Bonifacio Global City Taguig, Metro Manila Attention: Mr. Dennis G. Dimagiba Mr. Jose Jaime V. Cruz Gentlemen : This refers to your application for relief from double taxation dated June 10, 2004, on behalf of your client, Autodesk Asia Pte., Ltd (AAPL), requesting confirmation that the income that it will receive from CIM Technologies, Inc. (CIM) under an Autodesk Authorized Distributor Agreement are in the nature of business profits, and therefore not subject to Philippine income tax, pursuant to the Philippines-Singapore tax treaty and the Tax Code of 1997. It is represented that APPL is a nonresident foreign corporation organized and existing and under the laws of Singapore with principal address at 391 B Orchard Road, # 12-06, Ngee Ann City, Tower B Singapore 238834; that its principal activities are manufacturing, trading, technical support services, R & D and consulting services in respect of computer-aided design, engineering and animation software products; that its primary trading business consists of sales, marketing and distribution of Autodesk products throughout the Asia-Pacific region including the Philippines through authorized distribution channels; that it is licensed by Autodesk Inc. (Autodesk USA), a company organized and existing under the laws of Delaware, USA, to distribute the Autodesk products, which consists of computer-aided design software solutions; that it is granted the licensing and distribution right for the Asia-Pacific region by Autodesk USA; that on November 13, 2000, AAPL obtained a license from the Securities and Exchange Commission (SEC) to operate a representative office in the Philippines, but to date, no petition for cancellation or withdrawal of its license appears to have been filed; that CIM is a corporation organized and existing under the laws of Philippines with principal address at LG 103, Peninsula Court Building 8735 Paseo de Roxas corner Makati City, Philippines; that on February 1, 2004, AAPL entered into a standard Autodesk Authorized Distributor Agreement (Agreement) wherein CIM was appointed by AAPL as its non-exclusive Autodesk Authorized Distributor for the products within the Philippines; that the products shall be those set out in Exhibit A of the Agreement and the computer software programs designated therein, the copyright of which subsists with Autodesk Inc. and is licensed to AAPL; that all prices are on an Incoterms 2000 "Ex-Works" (fulfillment facility as notified by AAPL) basis; that the price to CIM for each of the Products (the "Per Copy Fee") shall be as set forth in AAPL's then prevailing price list as notified to CIM; that AAPL has the right at any time to revise the prices in the prevailing price list with thirty (30) days' advance written notice (including via electronic mail or through Autodesk's website) to CIM and such revisions shall apply to all orders received after the effective date of revision; that AAPL shall submit an invoice to CIM upon shipment of each product ordered by CIM covering its per copy fee for the products; that any invoice amount, paid in US Dollars, shall be due within forty-five (45) days of the invoice date; that any invoiced amount not received in full when due shall further be subject to a service charge of one and half percent (1.5%) per month; that the Agreement shall continue in force for a fixed term until January 31, 2005 unless terminated earlier under the provisions of Section 9 of the Agreement and at the end of the fixed term, the Agreement shall terminate automatically without notice and without administrative or judicial resolution unless the Agreement is extended by notice in writing by AAPL for such additional period as may be specified by AAPL, and after which, the Agreement shall automatically terminate. In reply, please be informed that the fees to be paid by CIM to Autodesk are payments for the use or the right to use of a copyright of literary, artistic or scientific work and as such are considered royalties within the definition of such term in paragraph 3, Article 12 (Royalty) of the Philippines-Singapore tax treaty and under Revenue Memorandum Circular No. 77-2003 (Classification for Software for Income Tax Purposes), dated November 18, 2003, both quoted as follows: Article 12(3), Philippines-Singapore tax treaty: "3. The term 'royalties' as used in this Article means payments of any kind received a consideration for the use of, or the right to use, any copyright of literacy, artistic or scientific work, including cinematographic films or tapes for television or broadcasting, 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. IcTEaC "xxx xxx xxx" Revenue Memorandum Circular (RMC) No. 77-2003: "The term 'royalties' us generally used means payment 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 films or tapes used for radio or television broadcasting, 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. The term 'use' as contained herein shall include the reselling or distribution of software . (Emphasis supplied) "Software is generally assimilated as a literary, artistic or scientific work protected by the copyright laws of various countries including the Philippines, thus, payments in consideration for the use of, or the right to use, a copyright or a copyrighted article relating to software are generally royalties." "xxx xxx xxx" In relation, Article 12 (1) and 12 (2) of the Philippines-Singapore tax treaty also provides that: "Article 12 "Royalty" "1. Royalty 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 law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: "a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; "b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of` Singapore, the royalties shall be exempt; "c) in all other cases, 25 per cent of the gross amount of` the royalties. HACaSc "xxx xxx xxx" Based on the abovecited provision, royalties arising from sources within the Philippines and derived by a resident of Singapore shall be subject to the following preferential tax rates: (a) a rate not to exceed 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; (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; or (c) in all other cases, a rate not to exceed 25 percent of the gross amount of the royalties. Such being the case, and since CIM is not a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, this Office is of the opinion and so holds that the fees paid by CIM to AAPL pursuant to their Authorized Distributor Agreement, being royalties, shall be subject to income tax at a rate of 25 percent, based on the gross amount thereof. Finally, Section 108(A)(1) of the Tax Code of 1997 states that " the lease on the use of the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand for on other like property or right " falls within the definition of " sale or exchange of services " subject to 10 percent value-added tax (VAT). Accordingly, the royalty fees paid by CIM to AAPL shall be subject to 10 percent VAT (BIR Ruling No. ITAD 14-04 dated February 20, 2004) Under Sections 4 and 6 of the Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-02, and Section 7 of Revenue Regulations No. 14-2002, CIM being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10 percent VAT on such royalty fees before paying them to AAPL. In remitting the VAT withheld, CIM shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If CIM is VAT-registered taxpayer, the duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input VAT by CIM upon filing its own VAT return. If it is not a VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as an " expense " or " asset " on the part of CIM; whichever is applicable. In addition, CIM is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of AAPL, the first three copies to be kept by the CIM and the fourth copy by AAPL as its file. 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. aSEHDA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service