ITAD Ruling No. 163-00

October 30, 2000 ITAD RULING NO. 163-00 RP-Indonesia Article 12 Joaquin Cunanan and Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City Attention: Atty . Alexander B . Cabrera Partner, Tax Services Department Gentlemen : This refers to your letter dated May 11, 1999 on behalf of Lepanto Consolidated Mining Co. (Lepanto) requesting for confirmation of your opinion that the service fees paid by Lepanto in connection with the Consultancy Agreement with PT Murray & Roberts Indonesia (PT Murray) is not subject to Philippine income tax pursuant to Article 5 (Permanent Establishment) and Article 7 (Business Profits) of the RP-Indonesia Tax Treaty. It is represented that Lepanto is a corporation organized under the laws of the Philippines; that Lepanto entered into a Consultancy Agreement with PT Murray, an entity organized under the laws of Indonesia whereby the latter is to provide consulting services to the former; that PT Murray has no permanent establishment in the Philippines as evidenced by a Certificate of Non-Registration issued by the Securities Exchange Commission dated April 27, 1999; that the services rendered by PT Murray to Lepanto under the aforementioned Consultancy Agreement consists of providing consultancy and supervisory services for the Drilling, Charge-up and Blast, Spoil Mucking, Support-Rockbolt, Shotcreting for normal ground, Ventilation, Dumping, Installation of Services, Roadways stages of the execution of Phase II of the Nayak Internal Shaft Project and Nayak Decline Project; that the services will be rendered for an aggregate period of not exceeding 6 months by not more than 4 personnel of PT Murray who will be sent to the Philippines; that in consideration for the said services, Lepanto will pay PT Murray US$305,067.93. In reply, please be informed that Article 12 of the RP-Indonesia 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, if such resident is the beneficial owner of the royalties. "(2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that State. However, the tax so charged shall not exceed: (a) in the case of the Philippines; DIECTc (i) 15 percent 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 as determined by the said Board; and (ii) in all other cases, 25 percent of the gross amount of the royalties; (b) in the case of Indonesia; 15 percent of the gross amount of the royalties. "(3) . . . "(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, 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 , and includes payments of any kind in respect of motion picture films and works on films or video-tapes for use in connection with television or tapes for the use of radio broadcasting. (emphasis supplied) (5) . . ." Contrary to your opinion that the applicable provisions are Article 5 and Article 7 of the RP-Indonesia Tax Treaty, the case at hand falls squarely within the coverage of Article 12 (Royalties). This is for the reason that the tax on royalties under Article 12 is a specific tax on the gross amount paid, the imposition of which is not dependent on the existence of a permanent establishment in the Philippines. The consultancy and supervisory services provided by PT Murray to Lepanto constitute the use of information concerning industrial experience as contemplated under the provisions of paragraph (4) Article 12 of the RP-Indonesia Tax Treaty, as aforequoted. In which case, the consideration paid therefor is royalty within the above-mentioned provision of the RP-Indonesia Tax Treaty. aATHIE Furthermore, the said Consultancy Agreement is considered a technology transfer agreement under Section 4.2, Part I of the Intellectual Property Code (IP Code), as confirmed by the Documentation, Information and Technology Transfer Bureau of the Intellectual Property Office in their letter dated September 20, 1999 Re: Consultancy Agreement (For the Nayak Declines and of Phase II of the Internal Shaft Project) between Lepanto Consolidated Mining Co. and PT Murray & Roberts Indonesia. Accordingly, the payment for services performed by PT Murray shall be considered as royalties subject to the twenty five percent (25%) withholding tax pursuant to Article 12 of the RP-Indonesia Tax Treaty. Finally, the fees paid by Lepanto to PT Murray for the services rendered in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Lepanto shall be responsible for the payment of VAT on said services in behalf of PT Murray by filing a separate VAT declaration/return using BIR Form 1600 and the said VAT declaration/return can be used by Lepanto, as evidence in claiming input tax credit. (Sec. 4.102-1(b), 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, (SGD.) DAKILA B. FONACIER Commissioner of Internal Revenue