ITAD Ruling No. 162-02

September 17, 2002 ITAD RULING NO. 162-02 RP-Netherlands tax treaty Tax Code of 1997 Sec. 108 BIR Ruling No. ITAD-141-00 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Partner-Tax Service Gentlemen : This refers to your letter dated July 1, 2001 requesting confirmation of your opinion that the royalties paid by your client, Bank of Commerce (BOC), to Silverlake Netherlands B.V. (Silverlake) are subject to the preferential tax rate of fifteen percent (15%) pursuant to Article 12(2)(b) of the RP-Netherlands tax treaty. It is represented that Silverlake is a non-resident foreign corporation duly organized and existing under the laws of the Netherlands with principal office address at Officia I, De Boelelaan 7, 1083 HJ Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by the Certificate of Non-Registration issued by the Securities and Exchange Commission dated April 23, 2002; that BOC is a corporation duly organized and existing under Philippine laws primarily engaged in providing banking services; that on July 12, 2001, BOC and Silverlake entered into a Software Licensing Agreement (Agreement) whereby the latter granted BOC a non-exclusive, non-transferable, perpetual license to use its Banking Software Package ( Product ) provided in Schedule A of the Agreement, together with the manuals, specifications or other documentation in any printed, machine readable or other form including but not limited to listings, manual and magnetic media to be furnished under the Agreement; that the Product specifically consists of the following: 1. Silverlake Integrated Banking System (SIBS) modules which include: a. Customer information file; b. Current and savings account; c. Time deposit; d. Loans; e. General Ledger; f. Service delivery processor, and g. Local remittance 2. Axis Branch Delivery System with Signature Verification 3. WEB-based Tellering System 4. Interface to the existing GL System 5. Interface to the existing ATM System 6. Enhancements to the Silverlake GL System that in consideration for the Product , BOC agreed to pay Silverlake the total amount of US$250,000 which shall be exclusive of value-added tax (VAT); and that an additional software license fee of US$78,000, exclusive of VAT, shall be paid in the event that Traders Royal Bank or similarly-sized bank is acquired by BOC. In reply, please be informed that Article 12 of the RP-Netherlands tax treaty provides as follows: "Article 12 ROYALTIES 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other state. 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 the royalties in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. 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 cinematograph films or tapes for radio or television broadcasting, any patent, trademark, 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 foregoing, royalties arising in the Philippines and paid to a resident of the Netherlands may be subject to Philippine income tax at a rate not to exceed 10 percent of the gross amount of the royalties where such are paid by an enterprise registered and engaged in preferred areas of activities, or 15 percent of the gross amount of the royalties in all other cases, provided the recipient is the beneficial owner of the royalties. Therefore, since the license fees to be paid by BOC to Silverlake are considered "payments received as a consideration for the use of information concerning industrial, commercial or scientific experience" and as such are royalties within the meaning of the aforequoted Article, your opinion that the same are subject to the preferential tax rate of 15 percent of the gross amount of royalties is hereby confirmed. ( BIR Ruling No. ITAD-141-00 dated September 19, 2000 ) Moreover, the above royalty payments to Silverlake shall be subject to the 10 percent value added tax (VAT) pursuant to Section 108 (A)(1) and (3) of the Tax Code of 1997. Accordingly, BOC being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of Silverlake by filing a separate VAT for return for and on behalf of Silverlake using 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 sufficient basis for the claim of input tax to be applied against the output tax that may be due from BOC if it is a VAT-registered taxpayer. In case BOC 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, whichever is applicable. In addition, BOC is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of Silverlake, the first three copies thereof to be given to Silverlake and the fourth copy to be retained by BOC as its file copy. ( Articles 4 & 6, Revenue Regulations 4-2002 ) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered 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