VAT Ruling No. 059-98

December 15, 1998 VAT RULING NO. 059-98 R.R. 7-95 000-00 Chemphil Group Kemwater Philippine Corporation Chemphil Building, 851 Arnaiz Avenue Legaspi Village, Makati City Attention: Ms. Carmelita G. Salgado Treasurer & Chief Financial Officer Gentlemen : This refers to your letter dated August 17, 1998 requesting for clarification on whether or not license fees paid to non-resident foreign corporation are subject to VAT considering that they are already subject to withholding tax. It is represented that your company, KEMWATER PHILS. CORPORATION (KPC) is a joint venture between the Chemphil Group and Kemira Chemicals Oy, a company organized and existing under the laws of Finland; that KPC has a license agreement with Kemira Chemicals Oy by which KPC can engage in the manufacture and sale of water treatment chemicals under trade marks, trade names and service marks of Kemira; that in consideration of the license granted, KPC paid Kemira a fee equal to Three Hundred Fifty Thousand Dollars ($350,000); that however, this license fee although paid at the inception of the joint venture is applicable only after the year 2001 when the joint venture expects to be in full operation; that at the present time, the joint venture is merely rehabilitating an old plant whose capacity is far less than the expected capacity of the major plant to be constructed in 2001; that it is expected that the demand for the product shall by then justify the capital expenditure; that the withholding tax of 15% of the license fee was deducted from the amount paid to Kemira (pursuant to BOI registration of KPC and the RP Finland Treaty); that, however it was not anticipated that there was also a VAT to be paid on it; that this is a point of difficulty to your foreign partners; that they consider this as double taxation on the same transaction; that it is likewise your view that historically, there was mutual exclusivity between the withholding tax and the sales tax which has subsequently been replaced by the VAT; that it is understood that a transaction was either subject to the withholding tax to the sales tax (now replaced by the VAT) not to both since that would constitute double taxation; that the licensee is the one expected to advance the VAT and as such, it is allowed to deduct this as input tax against its output tax does not seem to change the fact that this is a case of double taxation; that it is clear that the licensor is the entity being subject to the VAT but this is in addition to the tax withheld from its license fee. IHEaAc In reply, please be informed that Sec. 4.100-3 (b) of Revenue Regulations No. 7-95 implementing R.A. No. 7716 provides that: "The lessee or licensee, with respect to lease or use of property or property rights owned by the non-residents, . . . shall before making payment, withhold and remit the 10% VAT due thereon by filing a separate VAT return for and in behalf of the payee." Since the withholding tax above described is in the nature of advanced VAT payment in contrast to the 15% withholding tax imposed on the license fee, which is a form of income tax, your claim as to the existence of double taxation is baseless. Double taxation means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, for the same purpose and with the same character of tax. Hence, there would be no double taxation where a lessor of property has to reckon with and pays a real estate tax on the leased premises, a real estate dealer's tax based on rental receipts, and an income tax on such rentals, these impositions being of different character and purposes ( Villanueva vs. City of Iloilo, 26 SCRA 578). Moreover, no reference is made in the RP-Finland Tax Treaty to any preferential tax treatment with regard to sales taxes, and consequentially, to the value-added tax. Therefore, the licensor, Kemira Chemicals Oy, a foreign corporation doing business in the Philippines, is subject to the 15% withholding tax on its license fee income and the 10% withholding VAT. Your company, being in control of the payment, is the duly constituted withholding agent, and as such is duty bound to deduct, remit and withhold the afore-described withholding taxes. TEHIaA Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue