ITAD Ruling No. 194-00

December 8, 2000 ITAD RULING NO. 194-00 RP-US-Art. 13 RP-Russia-Art. 12 ITAD 121-00 Laya Mananghaya & Co. 22/F Antel 1000 Corporate Center 139 Valero Street, Salcedo Village Makati City Attention: Atty . Remegio A . Noval Partner, Tax & Corporate Services and Atty . Carolina Francisca A . Racelis Manager, Tax & Corporate Services Gentlemen : This refers to your letters dated August 23, 2000 and October 03, 2000 on behalf of your client, CALIFORNIA MANUFACTURING COMPANY, INC. ("CMC"), requesting for tax treaty relief ruling that royalties paid by CMC to CPC/AJI (ASIA) LTD. ("CPC") are subject to the fifteen per cent (15%) preferential tax rate on royalties, pursuant to the most-favored-nation-clause ("MFN") under the RP-US Tax Treaty in relation to the RP-Russia Tax Treaty. EDCTIa It is represented that CPC is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of the State of Delaware; that as per certification dated June 28, 2000, issued by the Securities and Exchange Commission, CPC was licensed to establish a regional or area headquarter in the Philippines on December 19, 1990; that the said headquarter does not constitute a permanent establishment; that CMC on the other hand is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at Km 18 South Superhighway, Paraaque; that CPC and CMC entered into two agreements, namely: a) Technology License Agreement on June 01, 1997, whereby CMC was provided with access to CPC and AJICO Technology for the sole purpose of applying such technology to the manufacture and distribution of CMC's products, and b) Trademark License Agreement on May 15, 1997, whereby CMCP grants CMC the exclusive right to use and CMC undertakes to so use the Trademarks only in connection with the Products indicated in the Agreement; that both Agreements were issued a Certificate of Compliance and Approval by the Intellectual Property Office (IPO) dated August 01, 2000. Based on the foregoing representations, it is your opinion that under Article 13 of the RP-US Tax Treaty which provides, viz: "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. "(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 the 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) "xxx xxx xxx" and considering that the lowest rate given to a third State is 15% as provided in Article 12(2) of the RP-Russia Tax Treaty which 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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of the State, but the tax so charged shall not exceed 15 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 cinematograph films and films and tapes for television or radio 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" the royalty payments made by CMC to CPC under the Technology License Agreement and Trademark License Agreement shall be subject to 15% preferential withholding tax rate pursuant to the "most favored nation clause" under the RP-US Tax Treaty in relation to the RP-Russia Tax Treaty. In reply, please be informed that under the above-quoted Article 13(2)(b)(iii) of the RP-US Tax Treaty, otherwise known as the "most favored nation clause", the tax imposable on royalties derived by a resident of the United States from within the Philippines shall be 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. Corollarily, the RP-US and RP-Russia Tax Treaties, particularly their provisions on the avoidance of double taxation, show that there is a similarity on the manner of payment of taxes, that is the allowable foreign tax credit on both treaties in the amount actually paid in the Philippines. Such being the case, your opinion that royalties arising in the Philippines and payable to CPC/AJI (ASIA) LTD. are subject to Philippine tax at the rate of 15% pursuant to the "most favored nation" clause provision of the RP-US Tax Treaty in relation to the RP-Russia Tax Treaty is hereby confirmed. (BIR Ruling No. ITAD 121-00) Moreover, the payments to be made by CMC for the grant of right and license 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, CMC shall be responsible for the payment of VAT on such royalties on behalf of CPC by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by CMC as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) SEIcAD This ruling is issued on the basis of the foregoing representations. However, if it will be disclosed or discovered upon investigation that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group