ITAD Ruling No. 158-04

December 29, 2004 ITAD RULING NO. 158-04 Article 12 Philippines-Singapore tax treaty BIR Ruling No. 105-95 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated November 25, 2004, on behalf of your client, Hotel Project Systems, Pte., Limited (HPSL), requesting confirmation that the royalties to be paid by New Coast Hotel, Inc. (NCHI) to HPSL are subject to the 25% preferential withholding tax rate under the Philippines-Singapore tax treaty and that such royalty payments are subject to the 10% value-added tax (VAT) pursuant to Section 108 of the 1997 Tax Code. It is represented that HPSL is nonresident foreign corporation organized and existing under the laws of Singapore with registered office at 20 Raffles Place #17-00, Ocean Towers, Singapore 0104 and its principal place of business at 10-12 Scotts Road, Singapore; 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 March 9, 2004; that NCHI is a corporation organized and existing under the laws of the Philippines with office address at 12th Floor, Net One Center, 26th Street Corner 3rd Avenue, Crescent Park West, Bonifacio Global City Taguig, Metro Manila; that it is a duly registered VAT taxpayer under BIR Certificate of Registration No. 9RC000086549 dated October 16, 2002 with Tax Identification Number 220-609-558-000; that on December 12, 2003 NCHI and HPSL entered into a License Agreement whereby NCHI was licensed and granted exclusive rights by HPSL over HPSL proprietary rights to use the name "Hyatt" and related wordmarks, trade and service marks and logos, and HPSL undertakes to provide the NCHI with experience and know-how of hotel technical systems and operating standards and services for international deluxe hotels in connection with NCHI's operation and management of a hotel to be named and called "Hyatt Manila Hotel and Casino"; that Section 2, Article IV of the License Agreement was amended per Letter Amendment dated August 11, 2004; that in consideration thereof, NCHI shall pay to HPSL royalties based on a percentage of gross operating profit of the Hotel; that said License Agreement and its Letter Amendment were registered with the Intellectual Property Office under Certificate of Registration No. 5-2004-00041 dated November 4, 2004. In reply, please be informed that Article 12 of the Philippines-Singapore 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 law of that State, but if the recipient is the beneficial owner of the royalties, the tax so charge 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 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 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. "xxx xxx xxx" Based on the aforementioned provisions, in the case of Philippines, royalties shall be taxed at a preferential rate not exceeding of 15% if the payor is a Board of Investments (BOI) registered enterprise and engaged in preferred areas of activities and royalties are paid in respect of cinematographic films or tapes for television or broadcasting. In all other cases, royalty payments will be taxed at a rate not exceeding 25% of the gross amount of royalties. Considering that NCHI is not a BOI registered enterprise which is engaged in preferred areas of activities in the Philippines and that the herein royalty payments are not in respect of cinematographic films or tapes for television or broadcasting, this Office is of the opinion and so holds that the royalty payments by NCHI to HPSL are subject to the preferential withholding tax rate of 25% of the gross amount of royalties pursuant to Article 12(2)(c) of the Philippine-Singapore tax treaty. (BIR Ruling No. DA-ITAD-24-00 dated January 28, 2000) Moreover, the said royalty payments to be paid by NCHI to HPSL are subject to 10% value-added tax pursuant to Section 108 of the Tax Code. Accordingly, NCHI being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% VAT withheld, NCHI 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 the proof of payment thereof shall serve as documentary substantiation for the claim of input tax by NCHI upon filing its own VAT. In addition, NCHI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of HPSL, the first three copies thereof to be given to HPSL and the fourth copy to be retained by NCHI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3, RR 8-2002; Section 7, RR No. 14-2002] AICTcE 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