VAT Ruling No. 020-99

March 4, 1999 VAT RULING NO. 020-99 Sec. 108 (A) (2), (3), (4)-132-97-020-99 SAP Philippines Inc . 32nd Flr. Citibank Tower Citibank Plaza 8741 Paseo de Roxas Salcedo Village, Makati City Attention: Ms. Eloisa L. Martinez Finance and Administration Manager Gentlemen : This refers to your letter dated 3 February 1999 requesting for confirmation of your opinion that: 1. The license fees paid or payable to SAP Germany and the maintenance fees paid or payable to SAP Philippines shall be treated as "royalties". 2. The royalty paid to SAP Germany is taxable in the Philippines which shall not exceed 10% of the gross amount of royalties. 3. The maintenance fees paid to SAP Philippines is taxable under Section 27(D)(1), NIRC at a final tax of 20% for royalties derived from sources within the Philippines. 4. The royalties paid to SAP Germany and SAP Philippines shall be subject to the 10% VAT. 5. The VAT due on sales of services by SAP Germany and SAP Philippines may be shifted to the buyer or licensee of these services. It is represented that SAP Philippines, Inc. is an affiliate of SAP AKTIENGESELLSCHAFT, (SAP Germany) a German corporation that has proprietary right over R/3 Software; that such Software has been licensed by SAP Germany to several Philippine users; that based on a standard licensing agreement executed by SAP Germany, SAP Philippines and the Licensee, SAP Germany grants the licensee a non-exclusive license to use the R/3 Software and all appurtenances thereto; that, in turn, SAP Philippines provides Maintenance Services, which includes "the delivery of all new releases and versions of SAP's general releases for commercial use, support via telephone, remote correction of defects, remote support/update, SAP's on-line Software services". In reply thereto, please be informed that your opinion is hereby confirmed, as follows: 1. On whether the license fees paid or payable to SAP Germany and the maintenance fees paid or payable to SAP Philippines shall be treated as "royalties". Your first query is answered affirmatively. Article 12(3) of the RP-West Germany Tax Treaty defines 'royalty' as payment of any kind received as a consideration for the use of, or the right to use ...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 ...".Hence, license fees and maintenance fees payable respectively to SAP Germany and SAP Philippines fall under this definition. 2. On whether the royalty paid to SAP Germany is taxable in the Philippines and which shall not exceed 10% of the gross amount of royalties. Your second query is likewise affirmed. Article 12(2)(b) of the RP-West Germany Tax Treaty effective January 1, 1985 provides that royalties arising in the Philippines and paid to a resident of West Germany may be taxed in the Philippines, but the tax so charged shall not exceed 10% of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, 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. (BIR Ruling 075-88 dated March 4, 1988) 3. On whether the maintenance fees paid to SAP Philippines is taxable under Section 27(D)(1), NIRC at a final tax of 20% for royalties derived from sources within the Philippines. This opinion is likewise confirmed. When SAP Philippines derives royalties in the form of maintenance fees payable by SAP licensees in the Philippines, it is then receiving royalties as a domestic corporation from sources within the Philippines. Consequently, such payments are subject to a final withholding tax of twenty percent (20%) pursuant to Section 97(D)(1) of the Tax Code of 1997. 4. On whether the royalties paid to SAP Germany and SAP Philippines shall be subject to the 10% VAT. We hereby confirm that the royalties payable to SAP Germany and SAP Philippines are subject to the 10% Value-added Tax under Section 108(A)(2), (3) and (4) of the Code. Moreover, Section 4.102-1 of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97, provides that the sale or exchange of services, as well as the use or lease of properties, as defined in Section 102(a) of the Tax Code (now Section 108, NIRC of 1997), shall be subject to the value-added tax (VAT). The phrase "sale or exchange of services" shall likewise include the lease or the use of, or the right to use, any industrial, commercial or scientific equipment. (BIR Ruling 132-97 dated December 11, 1997). 5. On whether the VAT due on sales of services by SAP Germany and SAP Philippines may be shifted to the buyer or licensee of these services. Pursuant to Section 105 of the Tax Code, " (T)he value-added tax is an indirect tax and the amount may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services ..." In turn, the duly validated VAT declaration/return insufficient evidence in claiming input tax credit by the licensee. (Sec. 4.102-1(b),RR-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, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group