ITAD Ruling No. 188-03

December 1, 2003 ITAD RULING NO. 188-03 Article 13, RP-US tax treaty Article 12, RP-China tax treaty Revenue Memorandum Circular No. 46-02 BIR Ruling No. DA-ITAD-101-03 Hunt-Universal Robina Corp. CFC Administration Bldg., E. Rodriguez Jr. Ave. Bagong Ilog, Pasig City Attention: Mr. Jorge Q. Concepcion Managing Partner Gentlemen : This refers to your letters dated August 26, 2003 and October 1, 2003 requesting confirmation of your opinion that the royalty fees paid by your company to Hunt-Wesson Foods International (Hunt USA) is subject to the preferential tax rate of 10 per cent pursuant to the " most favored nation " clause of the RP-US tax treaty in relation to the RP-China tax treaty as clarified by Revenue Memorandum Circular No. 46-2002. It is represented that Hunt USA is a non-resident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal address at 3352 Michelson Drive MS 1075 Irvine, California 92612-0650 USA; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 4, 2003; that Hunt-Universal Robina Corp. (Hunt Phil) is a Board Of Investments (BOI) registered corporation duly organized and existing under Philippine laws; that Hunt USA and Hunt Phil entered into an Amended and Restated Technical Assistance Agreement and Its Amendatory Agreement whereby Hunt USA granted Hunt Phil the sole and exclusive license to manufacture and sell in the Philippines the products listed in the said Agreement in accordance with the formulas and specifications furnished by the former and to affix to these products the trademark "HUNT'S;" that in consideration for such grant, Hunt Phil shall pay Hunt USA a royalty of three percent (3 %) of the net wholesale sales in Pesos of all the licensed products sold; and that the said Agreement has been duly registered with the Bureau of Patents, Trademarks and Technology Transfer on April 28, 1997 under Certificate of Registration No. 1954 which is valid for ten years from June 1, 1995 to May 31, 2005. In reply, please be informed that Article 13 of the RP-US tax treaty provides as follows: "Article 13 "ROYALTIES "(1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. IHDCcT "(2) However, the tax imposed by that other Contracting State shall not exceed (a) . . . (b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 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, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. (Emphasis supplied) "(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 films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term `royalties' also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. "xxx xxx xxx" Under the "most favored nation" clause found in Article 13(2)(b)(iii) of the RP-US tax treaty, the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of the Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. In this light, Article 12 of the RP-China tax treaty, which became effective on January 1, 2002, provides: "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 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 royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or "b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. (Emphasis supplied) SCHIac For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. "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 cinematography films, or films or tapes 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." "xxx xxx xxx" In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals, G.R. No. 127105 promulgated on June 25, 1999, the Supreme Court interpreted the "most favored nation" clause particularly the phrase "paid under similar circumstances" as referring to the manner of payment of taxes and not to the subject matter of the tax which is royalties. Hence, the "most favored nation clause of the RP-US tax treaty must be interpreted not only in relation to Article 12 of the RP-China tax treaty but also in connection with the provisions on the elimination of double taxation of both the RP-US and RP-China tax treaties. A perusal of the RP-US and RP-China tax treaties, particularly their provisions on the avoidance of double taxation, shows a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit in both treaties is the amount actually paid in the Philippines. Such being the case, this Office is of the opinion and so holds that royalty payments by Hunt Phil to Hunt USA beginning January 1, 2002 are subject to the preferential tax rate not exceeding 10 percent of the gross amount of royalties pursuant to the "most favored nation" provision of the RP-US tax treaty in relation to RP-China tax treaty. (BIR Ruling No. DA-ITAD-101-03 dated July 24, 2003) 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. HCEaDI Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service