ITAD Ruling No. 182-02

October 17, 2002 ITAD RULING NO. 182-02 RP-Thailand Article 13 BIR Ruling No. ITAD 177-00 Asea Brown Boveri, Inc. Km. 20 South Superhighway Paraaque City Attention: Atty. Dixie E. Dugan Tax and Legal Manager Gentlemen : This refers to your letter dated April 16, 2001, requesting confirmation of your opinion that your royalty payments to ABB Limited (ABB) are subject to the twenty-five per cent (25%) preferential tax rate pursuant to the RP-Thailand Tax Treaty. It is represented that ABB is a non-resident foreign corporation organized and existing under the laws of Thailand with business address at 297 Moo 4, Bangpoo Industrial Estate Soi 6, Sukhumvit Road, Praeksa District, Muang Samutprakarn, Thailand; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated January 18, 2001 issued by the Securities and Exchange Commission; that Asea Brown Boveri, Inc. (ABBI), on the other hand, is a domestic corporation organized and existing under the laws of the Philippines; and that on August 28, 2000, a Systems Applications and Programs (SAP) Implementation Agreement was entered into by and between ABB and ABBI wherein the former will provide assistance and consulting services, specifically defined as follows: 1) ABB commits itself to assist ABBI in the implementation of its SAP R/3 System through its SAP Core Team for a maximum engagement of 201 days inclusive of a 15% overtime ratio, 2) ABBI shall pay ABB the contract amount of Seventy-Five Thousand US Dollars (USD75,000), payable in five (5) equal monthly installments of USD15,000, net of applicable Philippine withholding tax; 3) all direct cost like travel, expenses, accommodations, meals, printing and other out-of-pocket expenses to be incurred by SAP Core Team shall be reimbursed by ABBI, upon presentation of the necessary documents and receipts, that ABBI is not responsible for payment of expenses not properly substantiated and documented, 4) ABBI agrees to provide assistance, education and necessary training in the localization of the Pre-configured R/3 system, coordinates with the SAP local project team for project objectives, schedules, activities, deliverables and integration issues, further, ABB shall ensure that skills transfer from it to ABBI local project team must take place; 5) ABBI is the owner of the Project Implementation and is responsible for and controls the project in terms of configuration, implementation, scope, costs, resources, deliverables and targeted solutions, ABBI will designate a Project Manager and local project team to work with SAP Core Team to facilitate the provision of services, all changes in the estimated project plans shall be the responsibility of ABBI. In reply, please be informed that Article 13 of the RP-Thailand Tax Treaty provides as follows: "Article 13 "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 laws of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) 15 per cent of the gross amount of the royalties if the royalties are paid: SIHCDA (i) by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities; or (ii) by an enterprise under the promotion of the Board of Investments of Thailand, or (iii) in respect of cinematographic films or tapes for television or broadcasting; b) 25 per cent of the gross amount of the royalties in all other cases. "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 foregoing, the royalty payments will be taxed at the preferential tax rate of fifteen per cent (15%) if the payor is a Board of Investments (BOI)-registered enterprise or by an enterprise under the promotion of the BOI of Thailand; or in respect of cinematographic films or tapes for television or broadcasting; and in all other cases, twenty five per cent (25%) of the gross amount of the royalties. Such being the case, since ABBI is not a BOI-registered enterprise, and the payments made by ABBI to ABB are not in respect of the use of or the right to use cinematographic films and films or tapes for radio or television or broadcasting, the herein royalty payments fall under Article 13(2)(b) of the RP-Thailand Tax Treaty. Accordingly, the royalty payments of ABBI to ABB shall be subject to the preferential tax rate of twenty five per cent (25%) based on the gross amount of royalties. ( BIR Ruling No. ITAD 177-00 dated November 14, 2000 ) Finally, the subject royalty payments are subject to the ten per cent (10%) value-added tax pursuant to Section 108 of the Tax Code of 1997, based on the contract price agreed upon by the parties. Accordingly, ABBI shall be responsible for the payment of VAT on such royalties on behalf of ABB by filing a separate VAT declaration/return using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The said VAT declaration/return can be used by ABBI as evidence in claiming input tax credit. ( Sec. 4.102-1(b), Revenue Regulations No. 7-95 ) This ruling is issued on the basis of the 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service