Royalties

April 1, 2009
ITAD BIR RULING NO. 011-09
Articles 7 and
5, Philippines-Australia tax
treaty; Sections 28 (B) (4)
and 108,
Tax Code of 1997, as
amended; BIR Ruling Nos.
DA-ITAD-039-04 and DA-I
TAD 198-00
Punongbayan & Araullo

Certified Public Accountants
20th Floor, Tower 1, The Enterprise Center
6766 Ayala Avenue, 1200 Makati City
Attention: Atty. Benedicta Du-Baladad

Tax Partner
Gentlemen :
This refers to your letter dated 24 August 2006 on behalf of

your client, Philippine AXA Life Insurance
Corporation ('AXA-Philippines' for brevity), requesting confirmation
that the payments for the lease of office equipment, furniture and
fixtures by AXA-Philippines to AXA Asia Pacific Holdings
Limited ('AXA-Australia' for brevity) are not subject to Philippine
income tax, pursuant to the provisions of the Philippines-Australia tax
treaty.TAcDHS
It is represented that AXA-Australia is a corporation duly

organized and existing under the laws of Australia as evidenced by its
Articles of Association, with principal office address at Level 9, 447
Collins St., Melbourne Victoria, Australia; that AXA-Australia is
incorporated with the purpose of providing financial products and
services that are fundamental to the well-being and advancement of
individuals, businesses and communities, to help people design and
implement financial plans to make the most of life's choices; that in
financial protection, AXA-Australia's products allow people to make
important commitments confidently — from buying their homes, to
having children, to building careers, people can protect themselves,
their families and their businesses from the financial consequences of
personal injury or death, savings, investments and superannuation,
AXA-Australia helps people to save for important needs — from
educating children, to travel and leisure, to retirement, AXA-Australia
helps people achieve the lifestyles they desire; that it is responsible
for the Global AXA Group's life insurance and wealth management
businesses in the Asia-Pacific region; that AXA-Australia has
operations in Hong Kong SAR, China, Singapore, Indonesia,
Philippines, Thailand, India, Malaysia, Australia and New Zealand;
that AXA-Australia is not registered either as a corporation or as a
partnership in the Philippines as evidenced by the Certification of
Non-Registration of Corporation/Partnership dated 17 August 2006,
issued by the Philippine Securities and Exchange Commission; that
on the other hand, AXA-Philippines is a domestic corporation with
principal office located at 6/F Philippine AXA Life Centre, Sen. Gil
Puyat Avenue, Makati City.
It is further represented that on 01 January 2003 a Lease
Agreement was entered into by and between AXA-Philippines and
AXA-Australia whereby AXA-Australia (Lessor) agrees to lease to
AXA-Philippines (Lessee) the properties described in the Schedule of
Furniture and Fixtures as of December 31, 2002 of the Lease
Schedule, (the 'Property') and such other property(ies) as the Lessor
may lease to the Lessee from time to time as described in a similar
Lease Schedule(s); that such additional Lease Schedule(s) which
may be executed from time to time hereafter shall likewise constitute
a part or parts of the Lease Agreement as if set forth in full therein;
that the term "Lease Schedule" shall include such other schedule(s)
as the parties may agree from time to time; that for purposes of the
Lease Agreement, The Property shall include all original items, parts,
accessories and additions thereto as well as replacements thereof,
as well as any other chattels/movables which the Lessor and the
Lessee may from time to time include in the Lease Agreement; that
the rental payment is One Million Four Hundred and Sixty Thousand
Nine Hundred and Twenty Pesos (P1,460,920.00), payable and due
quarterly in advance until the termination or expiration of the Lease
Agreement; that the term of this Agreement shall be Twenty (20)
quarters, from the delivery and acceptance date specified, unless
sooner terminated as set forth in the Lease Agreement; that the term
of this Agreement shall have an obligatory, non-cancellable period
which in no case shall be less than 5 years; and that the issue or
transaction subject of the above application is not under investigation,
on-going audit, administrative protest, claim for refund or issuance of
a tax credit certificate, collection proceedings, or a judicial appeal.
In reply, please be informed that the Section 28 (B) (1) of the
National Internal Revenue Code (Tax Code) of 1997, as amended by
Republic Act No. 9337, applies in general to income received by a
nonresident foreign corporation from all sources within the
Philippines. It provides:
"Section 28. Rates of Income Tax on Foreign
Corporations. —
xxx xxx xxx
(B) Tax on Nonresident Foreign Corporation. —
(1) In General. — Except as otherwise
provided in this Code, a foreign corporation not
engaged in trade or business in the Philippines
shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each
taxable year from all sources within the
Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments
or other fixed or determinable annual, periodic
or casual gains, profits and income, and capital
gains, except capital gains subject to tax under
subparagraph 5(c) and (d): Provided, That
effective January 1, 2009, at the rate of income
tax shall be thirty percent (30%).
xxx xxx xxx
However, Section 32 (B) (5) of the Tax Code of 1997, provides:
"Section 32. Gross Income. —
xxx xxx xxx
(B) Exclusions from Gross Income. — The following
items shall not be included in gross and shall be exempt from
taxation under this Title:
xxx xxx xxx
(5) Income Exempt under Treaty. —
Income of any kind, to the extent required by
any treaty obligation binding upon the
Government of the Philippines. DHSCTI
xxx xxx xxx"

Since AXA-Australia is a resident of Australia pursuant to
Article 4 of the Philippines-Australia tax treaty, the provisions of said
treaty may be used to determine the taxability of its income in the
Philippines. In this regard, Article 7, and in relation thereto, Article 5
of the Philippines-Australia tax treaty provide:
"Article 7
BUSINESS PROFITS
1. The profits of an enterprise of one of the Contracting
States shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise
carries on business as aforesaid, the profits of the enterprise
may be taxed in the other State, but only so much of them as
is attributable to —
a) that permanent establishment; or
b) sales within that other Contracting
State of goods or merchandise of the same or a
similar kind as those sold, or other business
activities of the same or a similar kind as those
carried on through that permanent
establishment if the sale or the business
activities had been made or carried on in that
way with a view to avoiding taxation in that
other State.
xxx xxx xxx."
"Article 5
PERMANENT ESTABLISHMENT
1. For the purposes of this Agreement, the term
'permanent establishment' means a fixed place of business
through which the business of an enterprise is wholly or partly
carried on.
xxx xxx xxx
4. An enterprise shall be deemed to have a permanent
establishment in one of the Contracting States and to carry
on business through that permanent establishment if
substantial equipment is being used in that State for more
than six months by, for or under contract with the
enterprise. (emphasis supplied)
xxx xxx xxx"
Based on the above provisions, the profits of an enterprise
which is a resident of Australia shall be taxable only in Australia
unless such enterprise carries on business in the Philippines through
a permanent establishment situated therein. If the enterprise which is
a resident of Australia carries on business as aforesaid, the profits of
such enterprise may be taxed in the Philippines but only so much of
such profits as is attributable to that permanent establishment.
Applying this to the instant case, the rental fees received by
AXA-Australia for the rental services rendered in the Philippines
under the subject Agreement shall be taxable in the Philippines only if
it has a permanent establishment in the Philippines in connection with
the activities giving rise to such income.
Peculiar in the Philippines-Australia tax treaty is paragraph 4 of
its Article 5 where a taxpayer is deemed to have a permanent
establishment in a contracting state if 'substantial equipment' is being
used for more than 6 months by, for or under contract with an
enterprise. Thus, an Australian enterprise shall be deemed to have a
permanent establishment in the Philippines, and as such shall be
subject to income tax in the Philippines, if substantial equipment is
being used in the Philippines for more than six (6) months by, for or
under contract with the Australian enterprise. ECcaDT
With respect to the instant application for relief, the question

now is whether or not the properties of AXA-Australia in the
Philippines which are subject of the herein Lease Agreement
constitute as 'substantial equipment' for the purposes of paragraph 4,
Article 5 of the Philippines-Australia tax treaty.
To understand the intention behind the said 'deemed
permanent establishment provision' involving the use of substantial
equipment, we are guided by the ATO Interpretative Decisions (ATO
ID) which discuss how the term 'substantial equipment' is interpreted
under other Australian tax treaties.
In one of the interpretative decisions, ATO ID (2006/337), the
ATO said that a 'computer system' which consists of approximately
ten pieces hardware, including servers and routers, software market
access and trading algorithms, collectively measuring 260cm x
398cm x 470cm, approximately weighing 164 kilograms, and valued
at $200,000, is not substantial equipment.
The reasons supporting this decision involving a computer
system are discussed at length below. Since the terms 'equipment'
and 'substantial equipment' are not defined in Australia's domestic
tax laws, the discussions under Draft Taxation Ruling TR 2006/D8
were used to explain the meaning of 'equipment', as follows.
"Paragraph 106 of TR 2006/D8 states that the relevant
meanings of 'equipment' in the Macquarie Dictionary, 2001,
5th Edition are: 'anything used in or provided for equipping, a
collection of necessary implements (such as tools)'.
Paragraph 107 of TR 2006/D8, states that paragraphs 33 to
36 of Taxation Ruling TR 98/21 point to a number of cases
and other references indicating that the meaning of
'equipment' is a wide one, and should be determined in the
context in which it appears."
From the ordinary meaning of the word 'equipment' the
Commissioner considers the taxpayer's computer system
includes a number of individual items of 'equipment' for the
purposes of the definition of permanent establishment."
Substantial
"The relevant meanings of 'substantial' in the
Macquarie Dictionary are:
• of ample of considerable amount,
quantity, or size
• of real worth
• of or relating to the essence of a thing;
essential, material, or important.
Paragraph 112 of TR 2006/D8 states that whether the
equipment in question is 'substantial' is a question of fact and
degree to be determined:
• on balance, according to the facts and
circumstances of each particular case; and
• in an absolute sense, that is, when
viewed independently; not in comparison with
something else; or THDIaC
• in a relative sense; that is, by

comparing it to something else.
Therefore, based on the ordinary meaning of the term
'substantial', the relevant case law — McDermott Industries
(Aust) Pty. Ltd. v. Commissioner of Taxation [2005], and the
guidance provided at paragraph 112 of TR 2006/D8 and
paragraphs 1.61 to 1.64 of the Explanatory Memorandum
(EM) to the International Tax Agreements Amendment Bill
2003, the Commissioner considers the following factors as
relevant in determining whether equipment is 'substantial':
• size
• quantity — where part of a unified
process
• value
• importance — in the sense of whether
the equipment plays a core role in the income
producing activity.
The common characteristic of examples of substantial
equipment in McDermott case and the EM is the size of the
equipment. It is considered therefore that the size is the key
factor and has greater weight in determining whether
equipment is 'substantial'. If an item of equipment is
sufficiently large in size, it will be 'substantial' in an absolute
sense. In such instances, this factor alone will be decisive
and further consideration of any other factors is not
necessary.
As the nature of the 'substantial equipment' test in
paragraph 112 of TR 2006/D8 is one of fact and degree,
determined on balance according to individual facts and
circumstances, it was considered that the factors listed above,
other than size, are not of themselves determinative. Each of
these factors needs to be considered with the others, having
regard to all facts and circumstances of the particular case.
Where there are a number of items of equipment that
are not large enough individually to be substantial in an
absolute sense, it was considered that the size of the items
collectively and the quantity can only be considered if the
items of equipment are part of a unified process. This arises
from the context in which the term 'substantial' appears in the
provision; that is, it is part of the expression 'substantial
equipment' as opposed to 'a substantial equipment'. TcHEaI
Value is a relevant factor on two levels; firstly, in the

sense of its cost (as per the ordinary meaning of the term)
and, secondly, in the sense of its value creating potential.
Equipment may be so valuable that it may be
considered substantial in an absolute sense. For example, in
one DTC, a tunneling equipment costing $600,000 was
considered substantial equipment purely on the basis of its
cost alone. However it is not possible to set a precise
monetary threshold in relation to cost that will be
determinative in all cases.
As to importance, Case No. H106 (1957) 8 TBRD 484
stated that "the meaning of 'substantial' is relative, and in the
case where the machinery required is not extensive and the
whole is involved, it is 'substantial'.
The above statement, the ordinary meaning of the
term 'substantial', and the context in which the term is used,
indicate that the sense in which importance is relevant is
where the equipment is core to the enterprise conducting its
income producing or value creating activity or to it creating its
product in a particular country.
Given the dimensions of the individual items of the
taxpayer's computer system, it was considered that
those individual items of equipment are each not large
enough to be considered substantial in an absolute
sense. Furthermore, the individual items of equipment are
part of a unified process, but when the size of the individual
items of equipment are viewed in aggregate, the dimensions
of the entire computer system again indicate that the
computer system is not substantial equipment by reason of its
size.
As there are only 10 individual items of equipment, it
was considered that this factor (size) does not indicate that
the computer system is substantial equipment.
It was considered that the taxpayer's computer system,
valued at $200,000, is not sufficiently high value for it to
constitute substantial equipment on the basis of value.
As only 50% of the taxpayer's business activities
involve electronic trading through the computer system, it
was considered that the computer system does not play a
core role in the taxpayer's income-producing activities.
On balance, there are insufficient grounds to conclude
that the taxpayer's computer system is 'substantial
equipment' for the purposes of the definition of permanent
establishment."
We adopt the foregoing criteria and discussions on size,
quantity, value and importance relevant to the determination of
whether or not the properties of AXA-Australia (i.e., office equipment,
furniture and fixtures) in the Philippines subject of the herein Lease
Agreement constitute as substantial equipment for the purposes of
paragraph 4, Article 5 of the Philippines-Australia tax treaty. Hence,
the office equipment, furniture and fixtures leased by AXA-Phils from
AXA-Australia are characterized in accordance with these criteria as
follows.
As to size
The items involved in the instant case are not large enough
individually to be substantial in an absolute sense.
As to size and quantity
Taken collectively, the size of the items being leased, which
consist of office equipment, furniture and fixtures, may seem large
enough to be considered substantial in an absolute sense.
However, the size of the items collectively and the quantity can only
be considered if the items of equipment are part of a unified
process. aTcIAS
Considering therefore that the subject items being leased do

not operate or are not being used as part of a unified process, said
individual items of equipment cannot be considered collectively to
determine substantial equipment.
As to value
As to the cost of the equipment, no precise or exact monetary
threshold was set in the foregoing ATO decisions which would be
determinative in all cases. While tunneling equipment valued at
US$600,000 is ruled as substantial equipment, a computer system
valued at US$200,000, on the other hand, is ruled as not being
substantial equipment.
For purposes of determining whether the subject equipment if
"substantial", we apply by analogy the standard set forth in Revenue
Regulations No. (RR) 4-86 in defining what constitutes "principally".
Under RR 4-86, "principally" means more than 50% of the entire
assets in terms of value. (Sec. (a) and (b), Revenue Regulations No.
4-86)
The equipment of AXA-Australia subject of lease by
AXA-Philippines has a total net book value of PHP6,353,118.00 or
US$115,333.00 based on the 2005 Financial Report of AXA-Australia.
A verification of the said 2005 Financial Report discloses that the
subject equipment being leased is approximately 5.76% in relation to
the total property, plant and equipment of AXA-Australia which is
US$2,000,000. Therefore, being less than 50% of the total property,
plant and equipment of AXA-Australia, the equipment subject of the
herein lease consisting of several office equipment, furniture and
fixtures, valued at US$115,333, cannot be considered substantial
equipment.
As to importance
Where the equipment is core to the enterprise conducting its
income producing or value creating activity or to it creating its
product in a particular country, it is substantial equipment. Should the
equipment subject of the herein lease of AXA-Philippines from
AXA-Australia be the heart of the latter's existence as a holding
company, and if said equipment be so relevant to the very business
purpose of AXA-Australia which is financial protection, then it could
be substantial equipment for AXA-Australia. Otherwise, or if the
subject leased equipment is not core to the income producing
activities of AXA-Australia, it cannot be considered substantial
equipment. ScHAIT
In view of all of the foregoing, the 'equipment' which consist of

office equipment, furniture and fixtures, subject of the herein Lease
Agreement is not considered 'substantial equipment' of
AXA-Australia in the Philippines under Article 5 (4) of
the Philippines-Australia tax treaty so as to constitute a permanent
establishment in the Philippines under the same Article.
However, please be informed that income derived from lease
of equipment by a resident of Australia is separately dealt with in
Article 12 of the Philippines-Australia tax treaty. Said Article 12
provides:
"Article 12
ROYALTIES
1. Royalties arising in one of the Contracting States,
being royalties to which a resident of the other Contracting
State is beneficially entitled, may be taxed in that other State.
2. Such royalties may also be taxed in the Contracting
State in which they arise, and according to the law of that
State. However, the tax so charged shall not exceed —
a) 15 per cent of the gross amount of the
royalties where the royalties are paid by an
enterprise registered with the Philippine Board
of Investments and engaged in preferred areas
of activities; and
b) in all other cases, 25 per cent of the
gross amount of the royalties.
3. The term "royalties" in this Article means payments
or credits, whether periodical or not, and however described
or computed, to the extent to which they are made as
consideration for —
a) the use of, or the right to use, any
copyright, patent, design or model, plan, secret
formula or process, trademark, or other like
property or right;
b) the use of, or the right to use, any
individual, commercial or scientific equipment;
c) the supply of scientific, technical,
industrial or commercial knowledge or
information;
d) the supply of any assistance that is
ancillary and subsidiary to, and is furnished as a
means of enabling the application or enjoyment
of, any such property or right as is mentioned in
paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such
knowledge or information as is mentioned in
paragraph (c); IcDCaT
e) the use of, or the right to use —

i. motion picture films;
ii. films or video tapes for use in
connection with television; or
iii. tapes for use in connection with
radio broadcasting; or
f) total or partial forbearance in respect
of the use of a property or right referred to in
this paragraph." (Emphasis supplied)
Based on the aforequoted provisions, payments to a resident
of Australia for the use of or the right to use any individual,
commercial or scientific equipment constitute as royalties taxable at
fifteen percent (15%) if the payor is a Board of Investments
(BOI)-registered enterprise; or twenty-five percent (25%) in all other
cases.
Accordingly, payments made for the lease of the subject
equipment which are royalty payments for the use of any individual,
commercial or scientific equipment may be subject to a preferential
tax rate not exceeding 25%.
Since the 25% preferential tax treaty rate is a maximum rate
imposed on royalties derived by a resident of Australia in the
Philippines under the Philippines-Australia tax treaty, we refer to the
Tax Code of 1997 which provides for a lower income tax rate of
seven and one-half percent (7 1/2%) on rentals of equipment derived
by nonresident foreign corporations which may apply to the instant
case. Section 28 (B) (4) of the Tax Code of 1997, as
amended provides:
"SEC. 28. Rates of Income Tax on Foreign
Corporations. —
xxx xxx xxx
xxx xxx xxx
(4) Nonresident Owner or Lessor of
Aircraft, Machineries and Other Equipment. —
Rentals, charter and other fees derived by a
nonresident lessor of aircraft, machineries and
other equipment shall be subject to a tax
of seven and one-half percent (7 1/2%) of gross
rentals or fees." (Emphasis supplied)DcSACE
In view thereof, this Office is of the opinion and so holds that

the income from lease of equipment derived by AXA-Australia from
AXA-Philippines under the subject Lease Agreement is subject to tax
at the rate of 7 1/2% based on gross rentals, the same not having
exceeded the 25% rate imposed on the gross amount of royalties
under the Philippines-Australia tax treaty, contrary to your opinion
that the said lease payments are not subject to income tax pursuant
to Article 7, in relation to Article 5 of the same tax treaty. (BIR Ruling
No. DA-ITAD-198-00 dated 07 December 2000)
Moreover, the lease payments of AXA-Philippines to
AXA-Australia under the subject Lease Agreement made from
January 1, 2003 to January 31, 2006, are subject to 10%
value-added tax (VAT) 1 under Section 108 (A) (1) of the Tax Code of
1997. And, the payments from February 1, 2006 shall be subject to
12% VAT 2 under Section 108 (A) (1) of the Tax Code of 1997, as
amended.
As to the procedure for withholding and paying the VAT,
Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3
of Revenue Regulations No. 8-2002, and Section 7 of Revenue
Regulations No. 14-2002, provide that AXA-Philippines shall be
responsible for the withholding of the VAT on the lease payments
before remitting them to AXA-Australia. In remitting to the Bureau of
Internal Revenue the VAT withheld on the lease payments,
AXA-Philippines shall use BIR Form No. 1600 (Monthly Remittance
Return of VAT and Other Percentage Taxes Withheld). If a
VAT-registered taxpayer, AXA-Philippines may use as documentary
substantiation for its claim of input VAT the duly filed BIR Form No.
1600 and the proof of payment accompanying it. In addition,
AXA-Philippines is required to issue in quadruplicate the Certificate of
Final Tax Withheld at Source (BIR Form No. 2306), the first three
copies for AXA-Australia and the fourth copy for AXA-Philippines as
its file copy.
Very truly yours,
(SGD.) SIXTO S. ESQUIVIAS IV

Commissioner of Internal
Revenue
Footnotes
1.Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107,
108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151,
151, * 236, 237 and 288 of the National Internal Revenue Code of
1997, as Amended, and for Other Purposes), which was signed into
law on May 24, 2005 and became effective on November 1, 2005,
amended Section 108 (A) to read as:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of services,
including the use or lease of properties selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: Provided, that the President,
upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2
4/5%); or
(ii) National government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 1/2%).
. . . The phrase 'sale or exchange of services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright,
patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
xxx xxx xxx"
2.The VAT rate was increased to 12% on February 1, 2006, in accordance
with the Memorandum of the Executive Secretary to the Secretary of
Finance dated January 31, 2006, as circularized by Revenue
Memorandum Circular No. 7-2006 (Publishing the Full Text of the
Memorandum from Executive Secretary Eduardo R. Ermita dated
January 31, 2006 Approving the Recommendation of the Secretary
of Finance to Increase the Value Added Tax Rate from Ten Percent
to Twelve Percent) dated January 31, 2006.
||| (ITAD BIR Ruling No. 011-09, [April 1, 2009])
June 10, 2014
Article 12 (Royalties),
Philippines-Japan tax
treaty
Arkray Industry, Inc.

Lot 22 Phase 1A
First Philippine Industrial Park
Sta. Anastacia, Santo Tomas
Batangas
Attention: Ms. Gemma S. Mapola

Accounting Manager
Gentlemen :
This refers to your tax treaty application ("TTRA") filed on July

1, 2013, requesting confirmation that royalties paid by Arkray Industry,
Inc. ("AII") to Arkray Factory, Inc. ("AFI") are subject to income tax at
the rate of 10% pursuant to the Convention between the Government
of the Republic of the Philippines and the Government of Japan with
respect to Taxes on Income, ("Philippines-Japan tax treaty"), as
amended by the 2009 Protocol. HAIDcE
AFI is a non-resident foreign corporation organized and
existing under the laws of Japan with business address at 1480, Koji,
Konan-cho Koka-shi, Shiga, 520-3306, Japan per certificate of fiscal
residence issued on January 16, 2013 by the District Director of
Minakuchi Tax Office. It is not registered as a corporation or a
partnership in the Philippines per certification of non-registration
issued by the Securities and Exchange Commission on February 13,
2013. On the other hand, AII is a domestic corporation organized and
existing under the laws of the Philippines with principal address at Lot
22 Phase 1A, First Philippine Industrial Park, Sta. Anastacia, Sto.
Tomas, Batangas.
It is represented that on November 1, 2011, AFI and AII
entered into a Technical Assistance Agreement ("Agreement") which
shall be effective from the effective date until October 31, 2012 and
shall be renewed for the additional period of one (1) year, unless AFI
gives notice to AII its intention to terminate this Agreement thirty (30)
days prior to the intended date of termination; that under the
Agreement, AFI granted to AII a non-exclusive license to sell and
manufacture the products using the Manufacturing Technology which
is the know-how and technologies necessary to manufacture the
products; that AII shall not transfer, create collateral on or grant
sublicenses of the Manufacturing Technology to any person or
entities; that AFI shall provide AII with the necessary assistance to
enable AII to manufacture the products; that AII shall report to AFI, on
or before the last day of the month following the last month of each
quarter ("reporting deadline"), the technical assistance fee equivalent
to five percent (5%) of the sales amount of the products in the same
quarter; that AFI shall invoice AII for the technical assistance fee on
or before the last day of the month following the month to which the
reporting date belongs to ("invoice deadline"); and that AII shall
permit AFI to examine books and records to review the calculation of
the technical assistance fee.
The parties also consented that AFI disclaims all
representations and warranties relating to the Manufacturing
Technology and that AII acknowledges that the Manufacturing
Technology disclosed by AFI is provided on as is basis; and that the
proprietary information of AFI including but not limited to, technical
information, know-how, pending patents and patents shall remain
confidential between the parties to the Agreement. As payment of the
technical assistance fee, the parties agreed that it shall be made by
Japanese Yen, US Dollars or any other currency, by telegraphic
transfer to the bank account designated by AFI, on or before the last
day of the month following the month to which the invoice deadline
belongs to; and that on March 25, 2013 AII paid AFI the total amount
of 68,000,000 Japanese Yen less tax as technical assistance fee.
It is finally represented that, per sworn statement issued by AII
on June 18, 2013, that the issue or transaction subject of this request
for ruling is not under investigation, on-going audit, administrative
protest, claims for refund or issuance of a tax credit certificate,
collection proceedings, or judicial appeal.
In reply, please be informed that Section 28 (B) (1) of the
National Internal Revenue Code (Tax Code) of 1997, as amended,
applies, in general, to royalties derived in the Philippines by a
nonresident foreign corporation. It provides:
Corporations. —
xxx xxx xxx
(1) In General. — Except as otherwise provided in this
Code, a foreign corporation not engaged in trade
or business in the Philippines shall pay a tax
equal to thirty-five percent (35%) of the gross
income received during each taxable year from
all sources within the Philippines, such as interest,
dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities,
emoluments, or other fixed or determinable
annual, periodic or casual gains, profits and
income, and capital gains, except capital gains
subject to tax under subparagraph 5(c): Provided,
That effective January 1, 2009, the rate of income
tax shall be thirty percent (30%). (Emphasis
supplied)
xxx xxx xxx"
However, said income derived by a nonresident foreign
corporation may be exempt or partially exempt from income tax
pursuant to a treaty obligation to which the Philippine government is
bound. Thus, Section 32 (B) (5) of the Tax Code of 1997, as
amended provides, viz.: TcHCDE
"SEC. 32. Gross Income. —

xxx xxx xxx
items shall not be included in gross income and
shall be exempt from taxation under this Title.
xxx xxx xxx
(5) Income Exempt under Treaty. — Income of
any kind, to the extent required by any
treaty obligation binding upon the
Government of the Philippines."
However, since tax treaties follow the principal method of
classification and assignment in mitigating the effects of double
taxation of income derived by a resident of a Contracting State from
sources in the other Contracting State, it is important to know how
income derived by AFI under the Agreement is classified for
purposes of the Philippines-Japan tax treaty.
Payments for services to be made by AII to AFI are generally
treated as business profits unless otherwise proven as royalties such
as if the activity involves the grant to use or the right to use an
intangible property like know-how (information concerning industrial,
commercial or scientific experience).
To distinguish between payments for the supply of services
and payments for the supply of know-how, the Organization for
Economic Co-operation and Development Model Tax Convention on
Income and on Capital (Condensed Version, July 22, 2010) made the
following commentaries on the subject, thus:
"11.1 In the know-how contract, one of the parties
agrees to impart to the other, so that he can use them for his
own account, his special knowledge and experience which
remain unrevealed to the public. It is recognised that the
grantor is not required to play any part himself in the application
of the formulas granted to the licensee and that he does not
guarantee the result thereof.
11.2 This type of contract thus differs from contracts for
the provision of services, in which one of the parties undertakes
to use the customary skills of his calling to execute work
himself for the other party. Payments made under the latter
contracts generally fall under Article 7.
11.3 The need to distinguish these two types of
payments, i.e., payments for the supply of know-how and
payments for the provision of services, sometimes gives rise to
practical difficulties. The following criteria are relevant for the
purpose of making that distinction: DTCSHA
— Contracts for the supply of know-how concern

information of the kind described in paragraph 11 that
already exists or concern the supply of that type of
information after its development or creation and include
specific provisions concerning the confidentiality of that
information.
— In the case of contracts for the provision of
services, the supplier undertakes to perform services
which may require the use, by that supplier, of special
knowledge, skill and expertise but not the transfer of
such special knowledge, skill or expertise to the other
party.
— In most cases involving the supply of
know-how, there would generally be very little more
which needs to be done by the supplier under the
contract other than to supply existing information or
reproduce existing material. On the other hand, a
contract for the performance of services would, in the
majority of cases, involve a very much greater level of
expenditure by the supplier in order to perform his
contractual obligations. For instance, the supplier,
depending on the nature of the services to be rendered,
may have to incur salaries and wages for employees
engaged in researching, designing, testing, drawing and
other associated activities or payments to
sub-contractors for the performance of similar services."
11.4. Examples of payments which should therefore not
be considered to be received as consideration for the provision
of know-how but, rather, for the provision of services, include:
— Payments obtained as consideration for
after-sales service;
— Payments for services rendered by a seller to
the purchaser under a warranty; DHSEcI
— Payments for pure technical assistance;

— payments for a list of potential customers,
when such a list is developed specifically for the payer
out of generally available information (a payment for the
confidential list of customers to which the payee has
provided a particular product or service would, however
constitute a payment for know-how as it would relate to
the commercial experience of the payee in dealing with
these customers);
— Payments for an opinion given by an engineer,
an advocate or an accountant; and
— Payments for an advice provided electronically,
for electronic communications with technicians or for
accessing, through computer networks, a
trouble-shooting database such as a database that
provides users of software with non-confidential
information in response to frequently asked questions or
common problems that arise frequently. (Pages
225-226)
Based on the commentaries, contracts for the supply of
know-how concern information that already exists or concern the
supply of that type of information after its development or creation
and generally include specific provisions concerning the
confidentiality of that information. Also, in most cases involving the
supply of know-how, there would generally be very little more which
needs to be done by the supplier under the contract other than to
supply existing information or reproduce existing material. On the
other hand, in a contract for the performance of services, the supplier
undertakes to perform services which may require the use, by that
supplier, of special knowledge, skill and expertise but not the transfer
of such special knowledge, skill or expertise to the other party. It also
involves, in a majority of cases, a very much greater level of
expenditure by the supplier in order to perform his contractual
obligations to the other party, such as salaries and wages for
employees engaged in researching, designing, testing, drawing and
other associated activities or payments to sub-contractors for the
performance of similar services.
Accordingly, since AFI will not merely perform technical
assistance and provide administrative services but will also impart
technical know-how through the use of the Manufacturing
Technology which requires the disclosure of special knowledge or
experience to AII, and AFI does not guarantee the result of the use of
the Manufacturing Technology and AII agreed to the confidentiality of
the information disclosed under the Agreement, this Office is of the
opinion and so holds that the Agreement involves the supply of
know-how. This being the case, the technical assistance fees paid by
AII to AFI constitute payment for royalties and not business profits.
In determining whether these payments for royalties are
subject to relief under the Philippine-Japan tax treaty, we refer to
Article 12 of the treaty:
"Article 12
1. Royalties arising in a Contracting State and paid to a
resident of the other Contracting State may be taxed in that
other Contracting State.
2. However, such royalties may also be taxed in the
Contracting State in which they arise, and according to the laws
of that Contracting State, but if the recipient is the beneficial
owner of the royalties the tax so charged shall not exceed: EScAHT
(a) 15 per cent of the gross amount of the

royalties if the royalties are paid in respect of the use of
or the right to use cinematograph films and films or
tapes for radio or television broadcasting;
(b) 10 per cent of the gross amount of the
royalties in all other cases.
3. Notwithstanding the provisions of paragraph 2, the
amount of tax imposed by the Philippines on the royalties paid
by a company, being a resident of the Philippines, registered
with the Board of Investments and engaged in preferred
pioneer areas of investment under the investment incentives
laws of the Philippines to a resident of Japan, who is the
beneficial owner of the royalties, shall not exceed 10 per cent
of the gross amount of the royalties.
4. 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 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."
Based on the above-quoted provisions, the Philippines may tax
the royalties paid by a resident thereof to a company which is a
resident of Japan at a rate not exceeding 15 percent if the royalties
are paid in respect of the use of or the right to use cinematograph
films and films or tapes for radio and television broadcasting; and 10
percent of the gross amount of royalties in all other cases.
In view thereof and considering that the royalties paid by AII to
AFI are not in respect of the use of, or the right to use, cinematograph
films and films or tapes for radio and television broadcasting, but
represent consideration for information concerning industrial,
commercial or scientific experience, i.e., provision of know-how,
such royalty fees are subject to the 10 percent final withholding tax
rate pursuant to Article 12 (2) (b) of the Philippines-Japan tax treaty,
as amended.
As regards the imposition of the VAT on royalties paid to AFI,
please be informed further that Section 108 of the Tax Code of 1997,
as amended, provides as follows:
"SEC. 108. Value-added Tax on Sale of Services and
Use or Lease of Properties. —
(A) Rate and Base of Tax. — There shall be levied,
assessed and collected, a value-added tax
equivalent to ten percent (10%) 1 of gross
receipts derived from the sale or exchange of
services, including the use or lease of
properties. HETDAa
The phrase 'sale or exchange of services' means the

performance of all kinds of services in the
Philippines for others for a fee . . . The phrase
'sale or exchange of services' shall likewise
include:
xxx xxx xxx
(2) The supply of scientific, technical or commercial
knowledge information; . . ."
Thus, in general, the VAT is imposed on the fees earned by
AFI in the Philippines, such that on every payment of the fees, AII is
generally required to withhold such VAT and treat the same as a
"passed on" VAT, pursuant to Section 4.110-3 (b) of Revenue
Regulations No. 7-95 as amended [now Section 4.114-2 (b) of
Revenue Regulations No. 16-05].
However, in Commissioner of Internal Revenue vs. Seagate
Technology, 2 the Supreme Court held, viz.:
"Applying the special laws we have earlier discussed,
respondent as an entity is exempt from internal revenue laws
and regulations.
This exemption covers both direct and indirect taxes,
stemming from the very nature of the VAT as a tax on
consumption, for which the direct liability is imposed on one
person but the indirect burden is passed on to another.
Respondent, as an exempt entity, can neither be directly
charged for the VAT on its sales nor indirectly made to bear, as
added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere debemus.
Where the law does not distinguish, we ought not to
distinguish.
Moreover, the exemption is both express and pervasive
for the following reasons:
. . ., RA 7916 states that 'no taxes, local and national,
shall be imposed on business establishments operating within
the ecozone.' Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio firmat regulam in
casibus non exceptis. An exception confirms the rule in cases
not excepted; that is, a thing not being excepted must be
regarded as coming within the purview of the general rule. ECDaTI
Moreover, even though the VAT is not imposed on the

entity but on the transaction, it may still be passed on and,
therefore, indirectly imposed on the same entity — a patent
circumvention of the law. That no VAT shall be imposed directly
upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and
imposed indirectly. Quando aliquid prohibetur ex directo
prohibetur et per obliquum. When anything is prohibited directly,
it is also prohibited indirectly.
xxx xxx xxx"
Based on the foregoing, sale of goods and/or services
including the use of or lease of properties, to person or entities
exempt from VAT by reason of PD 66 and RA 7916 are effectively
zero-rated. However, instead of zero-rating which is not available to
nonresident suppliers, the provision for exempt transactions under
Section 109 (K) of the Tax Code of 1997 which provides VAT
exemption for transactions that are exempt under special
laws, e.g., Republic Act No. 7916 or PEZA Law, is particularly
applicable to the instant case.
Such being the case, the royalties paid by AII, being a PEZA
registered enterprise, to AFI under the Agreement should be, as it is
hereby confirmed to be, exempt from VAT.
This ruling is issued on the basis of the foregoing facts as
represented. However, if upon investigation it shall be disclosed that
the actual facts are different, then this ruling shall be without force
and effect insofar as the herein parties are concerned.
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Commissioner of Internal Revenue
Footnotes
1.Effective February 1, 2006 the rate shall be 12%.
2.G.R. No. 153866, February 11, 2005.
||| (ITAD BIR Ruling No. 078-14, [June 10, 2014])
February 28, 2013
Articles 13 (Royalties) and

23 (Relief from Double
Taxation); Philippines-Unit
ed States of America tax
treaty
Sycip Gorres Velayo and Co.

6760 Ayala Avenue
Makati City
Attention: Atty. Romulo S. Danao, Jr.

Partner, Tax Services
Gentlemen :
This refers to your tax treaty relief application ("TTRA") filed
on June 29, 2011 requesting confirmation that royalties paid
by Towers Watson Philippines, Inc. ("Towers Watson
Philippines") to Towers Perrin Capital Corporation ("Towers
Perrin") are subject to income tax at the rate of 10 percent pursuant
to the Convention between the Government of the Republic of the
Philippines and the Government of the United States of America with
Respect to Taxes on Income ("Philippines-United States tax treaty").
Facts
Towers Perrin is a foreign corporation and a resident of the
United States based on its Certificate of Incorporation filed at the
State of Delaware in the United States on December 4, 2000, and on
its Certificate of Residence issued by the Internal Revenue Service of
the United States on October 4, 2011. Towers Perrin is located at
1011 Centre Road, Suite 325, Wilmington, Delaware, United States.
It is not registered as a corporation or partnership in the Philippines
based on the Certification of Non-Registration of Company issued by
the Securities and Exchange Commission on May 17, 2011. On the
other hand, Towers Watson Philippines is a domestic corporation
located at 15th Floor, The Marajo Tower, 312 26th Street corner 4th
Avenue, Fort Bonifacio, Global City, Taguig City, Philippines.
On January 1, 2011, Towers Watson Philippines and Towers
Perrin entered into a Global Intellectual Property License
Agreement where Towers Perrin granted Towers Watson
Philippines a non-exclusive license to use in the Philippines, among
others, the trademarks 'Towers Watson' and 'TW' and their
derivatives as part of the corporate name of Towers Watson
Philippines and its subsidiaries. The trademarks will be used in
connection with Towers Watson Philippines' business of providing
services, computer software, and publications in the fields of
compensation, employee benefits, human resources, insurance,
business management, risk management, information technology,
actuarial services, reinsurance brokerage services, and the provision
of related products and services. In consideration, Towers Watson
Philippines will pay royalties to Towers Perrin equivalent to 2 percent
of its gross revenues in each calendar quarter. Invoices will be issued
on a quarterly basis based on previous three months' actual gross
revenues. The royalties will be paid within thirty days after the receipt
of the relevant invoice from Towers Perrin. The Agreement took
effect on January 1, 2011 for an initial period of five years or until
December 31, 2015; thereafter, the Agreement may be extended by
mutual agreement of the parties. CTaSEI
Ruling
In reply, please be informed that under Section 14 of Revenue
Memorandum Order No. 72-2010 (Guidelines on the Processing of
Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine
Tax Treaties) ("RMO 72-2010"), which covers income derived or
which accrued on November 4, 2010 and thereafter, any availment of
tax treaty relief (exemption from income tax or reduction of tax) shall
be preceded by an application filed at the International Tax Affairs
Division ("ITAD") of this Bureau before the intended transaction or
payment of income, to wit:
"SEC. 14. When and Where to File the TTRA. — All
tax treaty relief applications (updated BIR Forms No. 0901-D,
0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C)
relative to the implementation and interpretation of the
provisions of Philippine tax treaties shall only be submitted to
and received by the International Tax Affairs Division (ITAD). If
the forms or any necessary documents are submitted to any
other BIR Office, the application shall be considered as
improperly filed.
Filing should always be made BEFORE the transaction.
Transaction for purposes of filing the TTRA shall mean before
the occurrence of the first taxable event.
Failure to properly file the TTRA with ITAD within the
period prescribed herein shall have the effect of disqualifying
the TTRA under this RMO." (Emphasis ours)
This condition is emphasized by the Court of Tax Appeals
in Mirant (Philippines) Operations Corporation vs. Commissioner of
Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where
it ruled:
"However, it must be remembered that a foreign
corporation wishing to avail of the benefits of the tax treaty
should invoke the provisions of the tax treaty and prove that
indeed the provisions of the tax treaty applies to it, before the
benefits may be extended to such corporation. In other words,
a resident or non-resident foreign corporation shall be taxed
according to the provisions of the National Internal Revenue
Code, unless it is shown that the treaty provisions apply to the
said corporation, and that, in cases the same are applicable,
the option to avail of the tax benefits under the tax treaty has
been successfully invoked. TSADaI
Under Revenue Memorandum Order 01-2000 of the

Bureau of Internal Revenue, it is provided that the availment of
a tax treaty provision must be preceded by an application for a
tax treaty relief with its International Tax Affairs Division (ITAD).
This is to prevent any erroneous interpretation and/or
application of the treaty provisions with which the Philippines is
a signatory to. The implementation of the said Revenue
Memorandum Order is in harmony with the objectives of the
contracting state to ensure that the granting of the benefits
under the tax treaties are enjoyed by the persons or
corporations duly entitled to the same.
The Court notes that nowhere in the records of the case
was it shown that petitioner indeed took the liberty of properly
observing the provisions of the said order. Petitioner quotes
various BIR, as well as ITAD, Rulings issued to several foreign
corporations seeking for a tax relief from the office of the
respondent. However, not any one of these rulings pertains to
the petitioner. It must be stressed that BIR rulings are issued
based on the facts and circumstances surrounding particular
issue/issues in question and are resolved on a case-to-case
basis. It would be thus erroneous to invoke the ruling of the
respondent in specific cases, which have no bearing to the
case of petitioner." (Emphasis ours)
This decision is upheld by the Supreme Court in Resolution
G.R. No. 168531 on February 18, 2008.
Furthermore, the necessary requirement laid down in RMO
1-2000 is reiterated in subsequent rulings of the Court of Tax
Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of
Internal Revenue (C.T.A. Case No. 456 dated May 29, 2009), CBK
Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A.
Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila
North Tollways Corporation vs. Commissioner of Internal
Revenue (C.T.A. Case No. 7864 dated April 12, 2011).
In view of the foregoing, since the Global Intellectual Property
License Agreement that gives rise to the royalties has been in effect
on January 1, 2011, but the relevant TTRA was filed only on June 29,
2011, this Office hereby DENIES relief on all royalties paid by Towers
Watson Philippines to Towers Perrin on and before June 29,
2011, pursuant to Section 14 of RMO 72-2010. Accordingly, said
royalties shall be subject to income tax at the rate of 30 percent under
Section 28 (B) (1) of the National Internal Revenue Code of
1997 ("Tax Code"), as amended, to wit: DTIACH

Corporations. —
xxx xxx xxx
all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums),
annuities, emoluments or other fixed or
determinable annual, periodic or casual gains,
profits and income, and capital gains, except
capital gains subject to tax under subparagraph
5(c) and (d) above: * Provided, That effective
January 1, 2009, the rate of income tax shall be
thirty percent (30%)."
On the other hand, the royalties paid to Towers Perrin on June
30, 2011 and thereafter are subject to a most-favored-nation
treatment (that is, the lowest rate of income as that imposed on
royalties of the same kind arising in the Philippines and paid to a
resident of a third State under similar circumstances), under
paragraph 2 (b) (iii), Article 13 of the Philippines-United States tax
treaty, to wit:
"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. DHITCc
2. However, the tax imposed by that other Contracting State

shall not exceed —
xxx xxx xxx
b) In the case of the Philippines, the least of:
xxx xxx xxx
(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.
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."
With respect to the most-favored-nation treatment, the
Supreme Court, in Commissioner of Internal Revenue vs. S.C.
Johnson and Son, Inc. and Court of Appeals (G.R. No. 127105 dated
June 25, 1999) ("SC Johnson case"), had required two conditions for
such treatment to apply. First, the royalties arising in the Philippines
and paid to a resident of the United States must be of the same
kind (that is, same type of intangible property, copyright, patent,
know-how, etc.) as those derived in the Philippines by a resident of a
third State and to which the tax treaty between the Philippines and
the third State subjects such royalties to a most-favored-nation
treatment. Second, the royalties paid to the United States resident
must be paid under similar circumstances vis-à-vis those royalties
paid to the third State resident, that is, the United States must allow
the same amount of foreign tax credit to its resident as that allowed
by the third State to its resident with respect to such royalties arising
in the Philippines and subjected to tax therein. As pointed out in
the SC Johnson case, royalties arising in the Philippines and paid to
a United States resident are not paid under similar circumstances
vis-à-vis royalties arising in the Philippines and paid to a German
resident by reason that Germany provides an additional foreign tax
credit of 10 percent (tax sparing credit) on the royalties or a total
credit of 20 percent as against a foreign tax credit of 10 percent
allowed by the United States. The pertinent portion of this ruling
reads: SaTAED
"The purpose of a most favored nation clause is to grant

to the contracting party treatment not less favorable than that
which has been or may be granted to the 'most favored' among
other countries. The most favored nation clause is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of
the most favored nation. The essence of the principle is to
allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the
subject matter of taxation, in this case royalty income, is the
same as that in the tax treaty under which the taxpayer is liable.
Both Article 13 of the RP-US Tax Treaty and Article 12(2)(b) of
the RP-West Germany Tax Treaty, above-quoted, speaks of
tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms
despite the absence of a matching credit (20% for royalties)
would derogate from the design behind the most favored nation
clause to grant equality of international treatment since the tax
burden laid upon the income of the investor is not the same in
the two countries. The similarity in the circumstances of
payment of taxes is a condition for the enjoyment of most
favored nation treatment precisely to underscore the need for
equality of treatment.
We accordingly agree with petitioner that since
the RP-US Tax Treaty does not give a matching tax credit of 20
percent for the taxes paid to the Philippines on royalties as
allowed under the RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the 10 percent rate
granted under the latter treaty for the reason that there is no
payment of taxes on royalties under similar
circumstances." (Emphasis ours)
For the purpose of the most-favored-nation treatment, there
is The Agreement between the Government of the Republic of the
Philippines and the Government of the United Arab Emirates for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income and on Capital ("Philippines-United
Arab Emirates tax treaty") which took effect on January 1, 2009.
Under paragraphs 1, 2 and 3, Article 12 of
the Philippines-United Arab Emirates tax treaty, royalties arising in
the Philippines and paid to a resident of the United Arab Emirates are
subject to income tax in the Philippines at a rate not to exceed 10
percent. The term royalties means payment 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 and
films or 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 ("know-how"). Article 12 reads: AECacS
"Article 12
Royalties
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
that State, but if the beneficial owner of the royalties is a
resident of the other Contracting State, the tax so
charged shall not exceed 10 per cent of the gross
amount of the royalties. The competent authorities of the
Contracting States shall, by mutual agreement, settle
the mode of application of this limitation.
3. The term 'royalties' as used in this Article means payment of
any kind received as a consideration for the use of, or
scientific work including cinematographic films and films
or 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."
Moreover, under paragraph 2, Article 23 of
the Philippines-United Arab Emirates tax treaty, the amount of foreign
tax credit that the United Arab Emirates will allow its resident on such
royalties arising in the Philippines and subjected to tax therein will be
the actual amount of tax levied in the Philippines, which is 10
percent under Article 12 of the treaty, to wit:
"Article 23
Elimination of Double Taxation
xxx xxx xxx
2. In the case of the United Arab Emirates, double taxation
shall be eliminated as follows:
Where a resident of the United Arab Emirates derives income
which in accordance with the provisions of this
Agreement, may be taxed in the Philippines, the United
Arab Emirates shall allow as a deduction from tax on
income of that person an amount equal to the tax on
income paid in the Philippines." cDHAES
In the same manner, under paragraph 1, Article 23 of

the Philippines-United States tax treaty, the amount of foreign tax
credit that the United States will allow its resident on such royalties
arising in the Philippines and subjected to tax therein will be
the actual amount of tax levied in the Philippines, to wit:
"Article 23
Relief from Double Taxation
Double taxation of income shall be avoided in the
following manner:
1. In accordance with the provisions and subject to the
limitations of the law of the United States (as it may be
amended from time to time without changing the general
principle hereof), the United States shall allow to a
citizen or resident of the United States as a credit
against the United States tax the appropriate amount of
taxes paid or accrued to the Philippines . . . Such
appropriate amount shall be based upon the amount of
tax paid or accrued to the Philippines, but the credit shall
not exceed the limitations (for the purpose of limiting the
credit to the United States tax on income from sources
within the Philippines or on income from sources outside
the United States) provided by United States law for the
taxable year . . ." (Emphasis ours)
In view of the foregoing, since royalties in general are subject
to income tax at the rate of 10 percent under the Philippines-United
Arab Emirates tax treaty, and since both the Philippines-United
States and the Philippines-United Arab Emirates tax treaties allow
only as foreign tax credit the actual amount of income tax levied on
such royalties in the Philippines, the royalties paid by Towers Watson
Philippines to Towers Perrin on June 30, 2011 and thereafter under
the Agreement for the use of the trademarks 'Towers Watson' and
'TW' and their derivatives in connection with the conduct of Towers
Watson Philippines' business in the Philippines shall be subject to
income tax at the rate of 10 percent, pursuant to paragraph 2 (b) (iii),
Article 13 of the Philippines-United States tax treaty, in relation to
paragraph 2, Article 12 of the Philippines-United Arab Emirates tax
treaty.
Finally, under Section 108 (A) of Tax Code, the said royalties
for the use of trademark in the Philippines are subject to value-added
tax ("VAT"), to wit:
HTScEI

(A) Rate and Base of Tax. — There shall be levied, assessed
and collected, a value-added tax equivalent to ten
percent (10%) of gross receipts derived from the sale or
exchange of services, including the use or lease of
properties: Provided, that the President, upon the
recommendation of the Secretary of Finance, shall,
effective January 1, 2006, 1 raise the rate of value-added
tax to twelve percent (12%) . . ."
Relative thereto, Towers Watson Philippines shall withhold
VAT on the royalties at the rate of 12 percent before remitting them
to Towers Perrin. Towers Watson Philippines shall use BIR Form No.
1600 (Monthly Remittance Return of Value-Added Tax and Other
Percentage Taxes Withheld). If it is a VAT-registered taxpayer, the
duly filed BIR Form No. 1600 and accompanying proof of payment
shall serve as documentary substantiation for Towers Watson
Philippines' claim of input tax on the royalties; otherwise, it may treat
such VAT as an asset or expense, whichever is applicable. VAT
withheld shall be remitted within ten days following the end of the
month the withholding was made. 2
This ruling is issued on the basis of the facts as represented.
However, if upon investigation it shall be disclosed that the actual
facts are different, then this ruling shall be without force and effect
insofar as the herein parties are concerned.
Very truly yours,

(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.The VAT rate was increased to 12 percent beginning February 1,
2006, in accordance with the Memorandum of the Executive
Secretary to the Secretary of Finance dated January 31, 2006, as
circularized by Revenue Memorandum Circular No.
7-2006 (Publishing the Full Text of the Memorandum from
Executive Secretary Eduardo R. Ermita dated January 31, 2006
Approving the Recommendation of the Secretary of Finance to
Increase the Value Added Tax Rate from Ten Percent to Twelve
Percent) dated January 31, 2006.
2.Pursuant to Section 4.112-2 of Revenue Regulations No.
16-2005 (Consolidated Value-Added Tax Regulations of 2005), as
amended by Revenue Regulations No. 4-2007 (Amending Certain
Provisions of Revenue Regulations No. 16-2005, As Amended,
Otherwise Known as the Consolidated Value-Added Tax
Regulations of 2005), which provides:
"SEC. 4.114-2. Withholding of VAT on Government Money Payments and
Payments to Non-Residents. —
xxx xxx xxx
(b) The government or any of its political subdivisions, instrumentalities or
agencies including GOCCs, as well as private corporation, individuals,
estates and trust, whether large or non-large taxpayers, shall withhold
twelve percent (12%) VAT, starting February 1, 2006, with respect to
the following payments:
(1) Lease or use of properties or property rights owned by non-residents;
and
(2) Services rendered to local insurance companies with respect to
reinsurance premiums payable to non-residents; and
(3) Other services rendered in the Philippines by non-residents.
In remitting VAT withheld, the withholding agent shall use BIR Form No.
1600 — Remittance Return of VAT and Other Percentage Taxes
Withheld.
VAT withheld and paid for the non-resident recipient (remitted using BIR
Form No. 1600), which VAT is passed on to the resident withholding
agent by the non-resident recipient of the income, may be claimed as
input tax by said VAT-registered withholding agent upon filing his own
VAT Return, subject to the rule on allocation of input tax among
taxable sales, zero-rated sales and exempt sales. The duly filed BIR
Form No. 1600 is the proof or documentary substantiation for the
claimed input tax or input VAT.
Nonetheless, if the resident withholding agent is a non-VAT taxpayer, said
passed-on VAT by the non-resident recipient of the income,
evidenced by the duly filed BIR Form No. 1600, shall form part of the
cost of purchased services, which may be treated either as an 'asset'
or 'expense', whichever is applicable, of the resident withholding
agent.
VAT withheld under this Section shall be remitted within ten (10) days
following the end of the month the withholding was made."
||| (ITAD BIR Ruling No. 039-13, [February 28, 2013])
May 24, 2012
Article 12 (Royalties) and 24

(Elimination of Double
Taxation) Philippines-Norwa
y tax treaty
Punongbayan and Araullo

20th Floor, Tower 1
The Enterprise Center
6766 Ayala Avenue
Makati City
Attention: Fulvio D. Dawilan

Tax Partner
Gentlemen :
This refers to your Tax Treaty Relief Application ("TTRA") filed

on May 29, 2007 requesting confirmation that royalties paid
by Norwegian Training Center-Manila of the Norwegian Maritime
Foundation of the Philippines ("Norwegian Training") to Ship
Manoeuvering Simulator Center AS ("Ship Maneuvering") and Frank
Mohn Services A/S ("Frank Mohn") are exempt from income tax
pursuant to the Convention between the Republic of the Philippines
and the Kingdom of Norway for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on
Income and on Capital ("Philippines-Norway tax treaty").
Facts
Ship Maneuvering and Frank Mohn are corporations organized
and existing under the laws of Norway based on their Certificates of
Registration issued by the Bronnoysund Register Centre in Norway
on November 24, 2006 and July 17, 2006, respectively. Ship
Maneuvering is located at Ladehammerveien 4, 7041, Trondheim,
Norway. Frank Mohn is located at Hardangerveien 150, Slotthaug, N
5851 Bergen, Norway. Both are not registered as corporations or
partnerships in the Philippines based on the Certificates of
Non-Registration of Corporation/Partnership issued by the Securities
and Exchange Commission on May 11 and 10, 2007, respectively.
On the other hand, Norwegian Training is a domestic corporation
situated at NTC-M Building, TESDA Complex, East Service Road,
Taguig City, Philippines. Norwegian Training was organized to
establish, sponsor, support and maintain non-degree, special or
continuing courses to upgrade the knowledge, qualification, and
training of Filipino seafarers working on board Norwegian-owned,
controlled, managed or operated vessels in coordination with
maritime institutions and enterprises in the Philippines and abroad,
which in effect will assist in the transfer of advanced maritime
technological and scientific knowledge to qualified Filipino citizens
and institutions.
On January 2, 2006, Norwegian Training and Ship
Maneuvering entered into a Service Agreement where Ship
Maneuvering agreed to conduct the following courses at Norwegian
Training's premises in Manila:
1. Ship Maneuvering Simulator Courses (5 days)
2. Dynamic Positioning Simulator Courses (5 days)
3. Offshore Crane Simulator Courses (10 days) TAaHIE
4. LNG/LPG Cargo Handling Courses (5 days)

Ship Maneuvering will provide the professional content of the
courses and master training manual programs, drawings, overheads,
CBT's video programs; update of course materials; training of
instructors; upgrading of training equipment and software; and new
equipment and software as necessary. In consideration, Norwegian
Training will pay Ship Maneuvering an annual service fee of
US$130,000.00 plus 50 percent of the net revenue generated from
the use of the above-mentioned Simulators software, to be paid
quarterly. The Agreement took effect on January 2, 2006 and is in
effect indefinitely.
On January 2, 2006, Norwegian Training and Frank
Mohn entered into a Memorandum of Agreement where Frank
Mohn agreed to conduct the following courses at Norwegian
Training's premises in Manila:
1. Frank Mohn II Special Course
2. Frank Mohn III Advanced Course (10 days)
3. Frank Mohn IV Advanced Course (5 days)
4. Frank Mohn V Advanced Course (5 days)
Frank Mohn will provide the professional content of the courses
and master training manual programs, drawings, overheads, CBT's
video programs; update of course materials; training of instructors;
upgrading of training equipment; and new equipment as necessary.
In consideration, Norwegian Training will pay Frank Mohn an annual
service fee of 40 percent of gross revenue generated from
administering the above courses to which a course fee will be
charged by Norwegian Training as follows:
1. Frank Mohn II Course: Member US$550.00,
Non-Member US$610.00.
2. Frank Mohn III Course: Member US$550.00,
3. Frank Mohn IV Course: Member US$295.00,
4. Frank Mohn V Course: Member US$275.00,
The service fee will be paid semi-annually. The Memorandum
took effect on January 2, 2006 and is in effect indefinitely.
Norwegian Training will market and administer the
above-mentioned courses in the Philippines.
Ruling
Relative thereto, please be informed that under Section III (2)
of Revenue Memorandum Order No. 1-00 (Procedures for
Processing Tax Treaty Relief Application) ("RMO 1-2000"), any
availment of tax treaty relief (exemption from income tax or reduction
of tax) shall be preceded by an application filed at the International
Tax Affairs Division ("ITAD") of this Bureau at least fifteen days
before the intended transaction or payment of income, to wit:
"III. Policies:
In order to achieve the above-mentioned objectives, the
following policies shall be observed: ATcaEH
xxx xxx xxx

2. Any availment of the tax treaty relief shall be
preceded by an application by filing BIR Form No. 0901
(Application for Relief from Double Taxation) with ITAD at least
15 days before the transaction i.e., payment of dividends,
royalties, etc., accompanied by supporting documents justifying
the relief. . ." (Emphasis ours)
This condition was emphasized by the Court of Tax Appeals
it ruled:
been successfully invoked.
This decision was upheld by the Supreme Court in a
Resolution (G.R. No. 168531) dated February 18, 2008.
Furthermore, the necessary requirement in RMO 1-2000 is
reiterated in subsequent rulings of the Court of Tax
Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009),
CBK Power Company Ltd. vs. Commissioner of Internal Revenue
(C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29,
2010) and Manila North Tollways Corporation vs. Commissioner of
Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011).
In view of the foregoing, since the subject TTRA was filed
on May 29, 2007, and the Service Agreement and the Memorandum
of Agreement which permit Norwegian Training to administer the
subject maritime courses in the Philippines were in effect on January
2, 2006, this Office hereby DENIES relief on service fees paid
by Norwegian Training to Ship Maneuvering and Frank Mohn before
the fifteenth day of filing the TTRA, or on June 13, 2007, in
accordance with Section III (2) of RMO 1-2000. Accordingly, said
fees shall be subject to income tax at the rate of 35 percent under
1997 ("Tax Code"), as amended, to wit: SATDHE

Corporations. —
xxx xxx xxx
(1) In General. — Except as otherwise provided
in this Code, a foreign corporation not engaged in trade
or business in the Philippines shall pay a tax equal to
thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the
Philippines, such as interests, dividends, rents, royalties,
salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits and income, and
capital gains, except capital gains subject to tax under
subparagraph 5(c) and (d) above: Provided, That
effective January 1, 2009, the rate of income tax shall be
On the other hand, the service fees Office paid on June 13,
2007 and thereafter are subject to relief under paragraphs 1 and 2 of
Article 12 of the Philippines-Norway tax treaty, to wit:
"Article 12
ROYALTIES
other State if such resident is the beneficial owner of the
royalties.
State in which they arise, and according to the law of that State.
However, when the royalties are taxable in the other
Contracting State, the tax so charged shall not exceed:
a) in Norway, 10 per cent of the gross amount of
the royalties including rentals or the rates referred to in
subparagraph 2(b)(ii) below, and
b) in the Philippines,
(i) 25 per cent of the gross
amount of the royalties, including 25 per
cent of the gross rentals or amount paid
for the use of, or the right to use, motion
picture films, films or tapes for radio or
television broadcasting;
(ii) 7.5 per cent of the gross
rentals or amount paid for the use of or
the right to use containers, or
(iii) the lowest rate of the
Philippine tax that may be imposed on
royalties of the same kind paid in similar
circumstances to a resident of a third
State."
Accordingly, the service fees, as royalties, are subject to the
lowest rate of income tax that may be imposed on royalties of the
same kind arising in the Philippines and paid in similar circumstances
to a resident of a third State ("most-favored-nation treatment").
Since the maritime courses developed by and belonging
to Ship Manoeuvering and Frank Mohn are copyrighted works, the
fact that Norwegian Training has the right to administer these
courses to the public makes Norwegian Training to be exercising the
right to communicate these works to the public, being
a copyright or economic right protected under Section 177.6 of
the Intellectual Property Code, to wit: EcASIC
"177. Copyright or Economic Rights. — Subject to the

provisions of Chapter VIII, copyright or economic rights shall
consist of the exclusive right to carry out, authorise or prevent
the following acts:
177.1. Reproduction of the work or substantial portion of
the work;
177.2. Dramatization, translation, adaptation,
abridgment, arrangement or other transformation of the work;
177.3. The first public distribution of the original and
each copy of the work by sale or other forms of transfer of
ownership;
177.4. Rental of the original or a copy of an audiovisual
or cinematographic work, a work embodied in a sound
recording, a computer program, a compilation of data and other
materials or a musical work in graphic form, irrespective of the
ownership of the original or the copy which is the subject of the
rental;
177.5. Public display of the original or a copy of the work;
and
177.6. Other communication to the public of the work."
(Emphasis ours)
Relative thereto, under paragraph 4, Article 12 of the treaty,
payments for the use of, or the right to use,
a copyright constitute royalties, to wit:
"4. The term 'royalties' as used in this Article means
or the right to use, any copyright, patent, trademark, design or
experience." (Emphasis ours)
Concerning the application of a most-favored-nation treatment
on royalties, the Supreme Court, in Commissioner of Internal
Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals (G.R.
No. 127105 dated June 25, 1999) ("S.C. Johnson case"), required
two conditions for such treatment to apply. First, royalties arising in
the Philippines and paid to a resident of the second State (in this case,
Norway) must be of the same class as those derived in the
Philippines by a resident of a third State to which the tax treaty
between the Philippines and the third State subjects such royalties to
a most-favored-nation treatment. Second, in eliminating or mitigating
the effects of double taxation on the royalties, the second State must
allow to its resident the same amount of tax credit or deduction as
that allowed by the third State to the latter's resident against the
income tax due of that resident in the third State with respect to the
royalties. Pertinent portion of this ruling reads:
"The purpose of a most favored nation clause is to grant
equality of treatment.aSIAHC
We accordingly agree with petitioner that since the

RP-US Tax Treaty does not give a matching tax credit of 20
allowed under the RP-West German Tax Treaty, private
payment of taxes on royalties under similar circumstances."
(Emphasis ours)
For this purpose, there is the Convention between the Republic
of the Philippines and the Czech Republic for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income ("Philippines-Czech tax treaty") effective January
1, 2004. Under paragraph 2 (b), Article 12 thereof, royalties (except
royalties for the use of, or the right to use, any copyright of
cinematograph films, and films or tapes for television or radio
broadcasting) arising in the Philippines and paid to a resident of
Czech are subject to income tax at the rate of 10 percent, to wit:
"Article 12
ROYALTIES
other State.
Contracting State in which they arise and according to the laws
of that State, but if the beneficial owner of the royalties is a
resident of the other Contracting State, the tax so charged shall
not exceed:
a) 10 per cent of the gross amount of the royalties
arising from the use of, or the right to use, any copyright
of literary, artistic or scientific work, other than that
mentioned in sub-paragraph (b), any patent, trade mark,
design or model, plan, secret formula or process, or
from the use of, or the right to use, industrial,
experience;
b) 15 per cent of the gross amount of the royalties
arising from the use of, or the right to use, any copyright
of cinematograph films, and films or tapes for television
or radio broadcasting.
The competent authorities of the Contracting
States shall by mutual agreement settle the mode of
application of these limitations."
Concerning the first requirement, under the article on Royalties
of the Philippines-Norway and the Philippines-Czech tax
treaties, copyright is among those intangible properties where
payments for the use of, or the right to use, thereof give rise to
royalties.
Concerning the second requirement, under the article on Relief
from Double Taxation of these treaties, income tax paid or withheld in
the Philippines on royalties arising therein and paid to a resident of
Norway and a resident of Czech are allowed as tax credit or
deduction against the income tax of these residents in these
countries, to wit:
"Article 24
ELIMINATION OF DOUBLE TAXATION
In Norway:
xxx xxx xxx
2. Where a resident of Norway derives items of income
which, in accordance with the provisions of Articles 8, 10, 11,
12, 16 and 22 may be taxed in the Philippines. Norway shall
allow as a deduction from the tax on the income of that person
an amount equal to the tax paid in the Philippines. Such
deductions shall not, however, exceed that part of the tax, as
computed before the deduction is given, which is attributable to
such items of income derived from the Philippines."
"Article 22
xxx xxx xxx
2. In the case of a resident of the Czech Republic,
double taxation shall be eliminated as follows:aSDCIE
a) The Czech Republic, when imposing taxes on

its residents, may include in the tax base upon which
such taxes are imposed the items of income which
according to the provisions of this Convention may also
be taxed in the Philippines, but shall allow as a
deduction from the amount of tax computed on such a
base an amount equal to the tax paid in the Philippines.
Such deduction shall not, however, exceed that part of
the Czech tax, as computed before the deduction is
given, which is appropriate to the income which, in
accordance with the provisions of this Convention, may
be taxed in the Philippines."
Accordingly, the service fees paid by Norwegian
Training to Ship Manoeuvering and Frank Mohn under the
Agreement and the Memorandum and made on June 13, 2007 and
thereafter shall be subject to income tax at the rate of 10
percent, pursuant to paragraph 2 (b) (iii), Article 12 of
the Philippines-Norway tax treaty, in relation to paragraph 2, Article
24 of that treaty, and paragraph 2 (b), Article 12, and paragraph 2,
Article 22 of the Philippines-Czech tax treaty.
Finally, under Section 108 (A) of the Tax Code, the fees in
question, being payments for the lease of intangible property
(copyright) in the Philippines, are subject to value-added tax ("VAT"),
to wit:
assessed and collected, a value-added tax equivalent to ten
exchange of services, including the use or lease of properties:
Provided, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, 1 raise
the rate of value-added tax to twelve percent (12%). . ."
Relative thereto, Norwegian Training shall withhold VAT on the
service fees at the rate of 12 percent before remitting them to Ship
Manoeuvering and Frank Mohn. Norwegian Training shall use BIR
Form No. 1600 (Monthly Remittance Return of Value-Added Tax and
Other Percentage Taxes Withheld). The duly filed BIR Form and its
accompanying proof of payment shall serve as documentary
substantiation for Norwegian Training's claim of input tax on the fees.
Otherwise, if Norwegian Training is not a VAT-registered taxpayer, it
may treat such VAT as an asset or expense, whichever is applicable.
VAT withheld shall be remitted within 10 days following the end of the
insofar as the herein parties are concerned. ADcEST
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.The VAT rate was increased to 12 percent beginning February 1, 2006, in
accordance with the Memorandum of the Executive Secretary to the
Secretary of Finance dated January 31, 2006, as circularized
by Revenue Memorandum Circular No. 7-2006 (Publishing the Full
Text of the Memorandum from Executive Secretary Eduardo R.
Ermita dated January 31, 2006 Approving the Recommendation of the
Secretary of Finance to Increase the Value-Added Tax Rate from Ten
Percent to Twelve Percent) dated January 31, 2006.
Otherwise known as the Consolidated Value-Added Tax Regulations
of 2005), which provides:
xxx xxx xxx
agencies including GOCCs, as well as private corporations,
individuals, estates and trusts, whether large or non-large taxpayers,
shall withhold twelve percent (12%) VAT, starting February 1, 2006,
with respect to the following payments:
and
Withheld.
agent.
||| (ITAD BIR Ruling No. 205-12, [May 24, 2012])
February 11, 2013
Articles 13 and
23, Philippines-US tax
treaty
Romulo Mabanta Buenaventura

Sayoc & De Los Angeles
30th Floor, Citibank Tower
8741 Paseo de Roxas, Makati City
Attention: Priscilla B. Valer

Partner
Gentlemen :
This refers to your application for tax treaty relief filed on June
23, 2011 requesting confirmation that royalties to be paid by Avon
Cosmetics, Inc. ("Avon Cosmetics") to Avon Products, Inc. ("Avon
Products") are subject to Philippine income tax at the reduced rate of
10 percent, pursuant to the Convention between the Government of
the Republic of the Philippines and the Government of the United
States of America with Respect to Taxes on Income ("Philippines-US
tax treaty"), in relation to the Convention between the Czech
Republic and the Republic of the Philippines for the Avoidance of
to Taxes on Income ("Philippines-Czech tax treaty"). TAIaHE
It is represented that Avon Products is a foreign corporation

organized and existing under the laws of the United States of
America and is a resident thereof for purposes of United States
taxation, based on its Certificate of Incorporation, as amended, and
on the Certification issued by the Internal Revenue Service of the
United States on February 14, 2011; that Avon Products is situated at
1345 Avenue of the Americas, New York, New York, United States;
that it is not registered as a corporation or partnership in the
Philippines based on the Certification issued by the Securities and
Exchange Commission on June 9, 2011; that, on the other
hand, Avon Cosmetics is a corporation organized and existing under
laws of the Philippines situated at Gercon Plaza, 7901 Makati Avenue,
Makati City, Philippines.
It is further represented that on June 6, 2011, Avon
Products and Avon Cosmetics entered into a License Agreement
("Agreement") to replace the Original Agreement dated January 1,
2001; that under the new Agreement, Avon Products grants Avon
Cosmetics an exclusive license to use the Property Rights in the
Philippines, strictly in connection with the manufacture, sale and
distribution of the Products; that Products means all products sold
by Avon Cosmetics in the Philippines; that Property Rights means all
rights of Avon Products with respect to the Technical Information,
Patent Rights, and Trade Rights; that Technical Information means
all commercial and technical assistance, information and know-how
now or thereafter in the possession of Avon Products which is
relevant to any aspects of the manufacture, distribution and sale of
the Products and which Avon Products is permitted under applicable
laws, regulations and agreements to disclose to Avon Cosmetics,
including, without limitation, information and know-how relating to (1)
production and manufacturing techniques, including any formulae,
secret or otherwise, used in connection therewith, (2) engineering
matters, (3) equipment design and maintenance, (4) research results,
techniques and procedures, including information on pending patent
applications, (5) marketing, (6) sales promotions and procedures, (7)
packaging and labeling, and (8) human resources, legal, purchasing,
finance, sourcing, computers and software support; that Patent
Rights means all patents and patent applications in the Philippines,
now or thereafter owned or controlled by or otherwise licensable
from Avon Products, including all divisions, reissues, re-examinations,
continuations, continuations-in-part, and extensions of the foregoing;
that Trade Rights means all trademarks, service marks, logos,
designs, trade names, trade dress and copyrights in the Philippines,
which are now or thereafter owned or controlled by or otherwise
licensable from Avon Products; that in consideration, Avon
Cosmetics shall pay royalties to Avon Products equivalent to 7
percent of the Net Sales of Products sold by Avon Cosmetics; that
royalties shall be in United States Dollars and shall be paid within 30
days following the last day of each calendar month or a part thereof;
and that the Agreement shall take effect on January 6, 2011, and
shall continue to have effect indefinitely, unless terminated.
It is finally represented that the royalties subject of this ruling
are not under investigation, on-going audit, administrative protest,
claim for refund or issuance of a tax credit certificate, collection
proceedings, or judicial appeal, based on the Certification issued by
the Treasurer of Avon Cosmetics on May 26, 2011.
In reply, please be informed that royalties paid to Avon, a
foreign corporation not engaged in trade or business in the
Philippines, are subject to income tax in the Philippines at the rate of
30 percent of the gross amount thereof. Section 28 (B) (1) (a) of the
National Internal Revenue Code of 1997 ("Tax Code"), as amended,
provides:
"SEC. 28. Rates of Income Tax on Foreign Corporations.
—
xxx xxx xxx
subparagraph 5(c) and (d) above: * Provided,
That effective January 1, 2009, the rate of
income tax shall be thirty percent (30%)"
However, such royalties may be exempt from income tax or
subject to a reduced rate to the extent required by any treaty
obligation on the Philippines. Section 32 (B) (5) of the Tax
Code provides: EDACSa

xxx xxx xxx
items shall not be included in gross income and shall be
exempt from taxation under this Title:
xxx xxx xxx
any kind, to the extent required by any treaty
obligation binding upon the Government of the
Philippines."
For this purpose, you invoke the Article 13 of
the Philippines-US tax treaty. Its paragraphs 1, 2 and 3 provide:
"Article 13
ROYALTIES
may be taxed by both Contracting States.
a) In the case of the United States, 15 percent of the
gross amount of the royalties, and
(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
of a third State.
thereof."
Under paragraph 2 (b) (iii) above, royalties arising in the
Philippines and paid to a resident of the United States may be taxed
in the Philippines at the lowest rate of income tax that may be
imposed on royalties of the same kind paid under similar
circumstances to a resident of a third State (also known as the
"most-favored-nation treatment").
Relative thereto, the Supreme Court, in Commissioner of
Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of
Appeals (G.R. No. 127105 dated June 25, 1999) ("S.C. Johnson
case"), requires two conditions for a most-favored-nation treatment
on royalties to apply. First, royalties arising in the Philippines and
paid to a resident of the other State, in this case, the United States,
must be of the same kind as those arising in the Philippines and paid
to a resident of a third State to which the latter's tax treaty with the
Philippines subjects the latter royalties to a most-favored-nation
treatment. Second, the method of elimination of double taxation
applied by the other State, in this case, the United States, on royalties
paid to a resident thereof must be the same as that applied by the
third State on royalties paid to its resident. Pertinent portions of
the SC Johnson case read:
"We are unable to sustain the position of the Court of
Tax Appeals, which was upheld by the Court of Appeals, that
the phrase 'paid under similar circumstances' in Article 13(2)(b),
(iii) of the RP-US Tax Treaty should be interpreted to refer to
payment of royalty, and not to the payment of the tax, for the
reason that the phrase 'paid under similar circumstances' is
followed by the phrase 'to a resident of a third state.' The
respondent court held that 'Words are to be understood in the
context in which they are used,' and since what is paid to a
resident of a third state is not a tax but a royalty 'logic instructs'
that the treaty provision in question should refer to royalties of
the same kind paid under similar circumstances. dctai
The above construction is based principally on syntax or

sentence structure but fails to take into account the purpose
animating the treaty provisions in point. To begin with, we are
not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the
circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on
nationality in the circumstances of such payment. On the other
hand, a cursory reading of the various tax treaties will show
that there is no similarity in the provisions on relief from or
avoidance of double taxation as this is a matter of negotiation
between the contracting parties. As will be shown later, this
dissimilarity is true particularly in the treaties between the
Philippines and the United States and between the Philippines
and West Germany.
xxx xxx xxx
As stated earlier, the ultimate reason for avoiding double
taxation is to encourage foreign investors to invest in the
Philippines — a crucial economic goal for developing countries.
The goal of double taxation conventions would be thwarted if
such treaties did not provide for effective measures to minimize,
if not completely eliminate, the tax burden laid upon the income
or capital of the investor. Thus, if the rates of tax are lowered by
the state of source, in this case, by the Philippines, there
should be a concomitant commitment on the part of the state of
residence to grant some form of tax relief, whether this be in
the form of a tax credit or exemption. Otherwise, the tax which
could have been collected by the Philippine government will
simply be collected by another state, defeating the object of the
tax treaty since the tax burden imposed upon the investor
would remain unrelieved. If the state of residence does not
grant some form of tax relief to the investor, no benefit would
redound to the Philippines, i.e., increased investment resulting
from a favorable tax regime, should it impose a lower tax rate
on the royalty earnings of the investor, and it would be better to
impose the regular rate rather than lose much-needed
revenues to another country.
At the same time, the intention behind the adoption of
the provision on 'relief from double taxation' in the two tax
treaties in question should be considered in light of the purpose
behind the most favored nation clause.
The purpose of a most favored nation clause is to grant
the RP-US Tax Treaty does not give a matching tax credit of 20
For this purpose, you invoke the Philippines-Czech tax treaty.
Concerning the first condition, paragraphs 1 and 2, Article 12 thereof
provide:
"Article 12
ROYALTIES
that other State.ESCTIA

Contracting State in which they arise and according to
the laws of that State, but if the beneficial owner of the
royalties is a resident of the other Contracting State, the
tax so charged shall not exceed:
arising from the use of, or the right to use, any
copyright of literary, artistic or scientific work,
other than that mentioned in sub-paragraph (b),
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
experience;
copyright of cinematograph films, and films or
tapes for television or radio broadcasting.
The competent authorities of the Contracting States
shall by mutual agreement settle the mode of
application of these limitations."
With respect to the first condition, under paragraph 3, Article 12
of the Philippines-United States tax treaty, the term royalties 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.
Royalties also include 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. Relative thereto, under
paragraph 2, Article 12 of the Philippines-Czech tax treaty, royalties
arising in the Philippines and paid to a resident of Czech and paid for
the use of, or the right to use, any copyright of literary, artistic or
scientific work (except cinematograph films, and films or tapes for
television or radio broadcasting), 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,
are subject to income tax at the rate of 10 percent.
Concerning the second condition, paragraph 1, Article 23 of
the Philippines-United States tax treaty, and paragraph 2, Article 22
of the Philippines-Czech tax treaty, provide:
United States:
"Article 23
RELIEF FROM DOUBLE TAXATION
Double taxation of income shall be avoided in the following
manner:
amended from time to lime without changing the general
taxes paid or accrued to the Philippines and, in the case
of a United States corporation owning at least 10
percent of the voting stock of a Philippine corporation
from which it receives dividends in any taxable year,
shall allow credit for the appropriate amount of taxes
paid or accrued to the Philippines by the Philippine
corporation paying such dividends with respect to the
profits out of which such dividends are paid. Such
not exceed limitations (for the purpose of limiting the
taxable year."
Czech
"Article 22
xxx xxx xxx
2. In the case of a resident of the Czech Republic, double
taxation shall be eliminated as follows:AEIcTD
a) The Czech Republic, when imposing taxes on its

residents, may include in the tax base upon which
such taxes are imposed the items of income
which according to the provisions of this
Convention may also be taxed in the Philippines,
but shall allow as a deduction from the amount of
tax computed on such a base an amount equal to
the tax paid in the Philippines. Such deduction
shall not, however, exceed that part of the Czech
tax, as computed before the deduction is given,
which is appropriate to the income which, in
accordance with the provisions of this Convention,
may be taxed in the Philippines.
b) Where in accordance with any provision of the
Convention income derived by a resident of the
Czech Republic is exempt from tax in the Czech
Republic, the Czech Republic may nevertheless,
in calculating the amount of tax on the remaining
income of such resident, take into account the
exempted income."
Under paragraph 1, Article 23 of the Philippines-United States
tax treaty, in eliminating or mitigating the effects of double taxation of
income (including royalties) paid to its resident and arising from
sources in the Philippines, the United States shall allow as
credit against the income tax due in the United States on such
income, the income tax imposed on that income in the Philippines. In
the same manner, under paragraph 2 (a), Article 22, in eliminating or
mitigating the effects of double taxation of income (including royalties)
paid to its resident and arising from sources in the Philippines,
Czech shall allow as deduction against the income tax due on such
income, the income tax imposed on that income in the Philippines. 1
Relative thereto, however, please be informed that Section 14
of Revenue Memorandum Order ("RMO") No. 72-2010, published in
the Manila Bulletin on October 20, 2010, and effective November 4,
2010 provides, as follows:
"SEC. 14. When and Where to File the TTRA. —
All tax treaty relief applications (updated BIR Forms No.
0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and
0901-C) relative to the implementation and interpretation of the
the forms of any necessary documents are submitted to any
other BIR office, the application shall be considered as
improperly filed.IHaECA
Filing should always be made BEFORE the

transaction. Transaction for purposes of filing the TTRA
shall mean before the occurrence of the first taxable event.
period prescribed herein shall have the effect disqualifying
the TTRA under this RMO. (Emphasis Supplied)"
In view thereof, since the TTRA was filed only on June 23,
2011, after the date of effectivity of the Agreement on June 6, 2011,
this Office hereby DENIES relief on all royalties under the Agreement
paid before June 24, 2011 in violation of the requirement that filing of
the TTRA should be made BEFORE the transaction under RMO
72-2010, that is the payment of royalties. Accordingly, said payments
shall be subject to tax at the rate provided for in Section 28 of the
above-cited Tax Code, as amended.
However, relief is hereby GRANTED to all payments made on
June 24, 2011 and thereafter. Accordingly, such royalties to be paid
by Avon Cosmetics to Avon Products pursuant to the Agreement, for
the use of the Technical Information, the Patent Rights and Trade
Rights in connection with the manufacture, sale and distribution of the
Products in the Philippines, being essentially royalties for the use of
patent, know-how, and trademark, are subject to income tax at the
rate of 10 percent of the gross amount thereof, pursuant to Article 12
of the Philippines-Czech tax treaty, as amended.
Furthermore, under Section 108 (A) of Tax Code, as amended,
the royalties in question, being payments for the use of intangible
properties (patent, know-how, and trademark) in the Philippines, are
subject to value-added tax ("VAT") at the rate of 12 percent, thus:
Relative thereto, Avon Cosmetics shall withhold VAT on the
royalties at the rate of 12 percent before remitting them to Avon
Products. Avon Cosmetics shall use BIR Form No. 1600 (Monthly
Remittance Return of Value-Added Tax and Other Percentage Taxes
Withheld). If Avon Cosmetics is a VAT-registered taxpayer, the
duly-filed BIR Form No. 1600 and its accompanying proof of payment
shall serve as documentary substantiation for its claim of input tax on
the royalties. Otherwise, Avon Cosmetics may instead treat such
VAT as an asset or expense, whichever is applicable. VAT withheld
shall be remitted within 10 days following the end of the month the
withholding was made.
Very truly yours,

(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Under paragraph 1 of Article 23, in addition to Philippine income tax
allowed as credit against United States income tax, Philippine
income tax imposed on the profits of a Philippine corporation who
paid dividends to a United States corporation, which owns at least
10 percent of the voting stock of the Philippine corporation, shall
be allowed as credit against United States income tax due on such
dividends and payable by the United States corporation. This
additional relief does not cover royaltiesunder Article 13 of
the Philippine-United States tax treaty.
Under paragraph 2 (b) of Article 22, instead of allowing deduction or credit,
Czech will exempt from Czech income tax, income arising in the
Philippines and derived by a resident of Czech and which is exempt in
Czech under the relevant article of the tax treaty. However, Czech will
apply the 'exemption-with-progression' method in computing the
taxable income of the recipient by taking into account the exempted
income and applying the corresponding rate of Czech income tax
thereon. This method of elimination of double taxation
does not cover royalties under Article 12 of the Philippines-Czech tax
treaty which are not exempt from Philippine income tax in the first
place.
accordance with the Memorandum of the Executive Secretary to
the Secretary of Finance dated January 31, 2006, as circularized
Ermita dated January 31, 2006 Approving the Recommendation of
the Secretary of Finance to Increase the Value Added Tax Rate
from Ten Percent to Twelve Percent) dated January 31, 2006.
August 27, 2013
Article 12, Philippines-China

tax treaty
Tantoco Villanueva De Guzman & Llamas

Law Offices
4th & 6th Floors, Filipino Building
135 Dela Rosa Street, Legaspi Village
Makati City
Attention: Atty. Cristina M. F. Villanueva
Mr. Michael Dennis D. Rayala
Gentlemen :

on December 1, 2011, on behalf of Beijing Perfect World Network
Technology Co., Ltd. ("BPWTC") (formerly the Beijing Perfect World
Co., Ltd.), requesting confirmation that the royalty payments by Level
Up, Inc. ("Level Up") to BPWTC are subject to a preferential tax rate
of 10 percent, pursuant to Article 12 of the Philippines-China tax
treaty. 1
It is represented that BPWTC, with address at 8th Floor,
Yingchuang Dongli Bldg., #1 Shanghai East Road, Haidian District,
Beijing, is a resident of China within the meaning of
the Philippines-China tax treaty, based on the Certificate of
Residence issued by the Haidian Local Tax Bureau of Beijing dated
July 22, 2011; that BPWTC is not registered either as a corporation or
as a partnership in the Philippines as shown in the Certification of
Non-Registration of Company issued by the Securities and Exchange
Commission on October 5, 2010; and that, on the other hand, Level
Up is a domestic corporation duly organized and existing under
Philippine laws located at the 11/F, Pacific Star Building, Makati
corner Sen. Gil Puyat Avenue, Makati.
It is further represented that on December 12, 2006, Level Up,
as the Licensee, and BPWTC, as the Licensor, entered into
a License Agreement for Perfect World2 Online English Version
("Agreement"), which was amended on March 28, 2011; that on
September 1, 2011 a Supplementary Agreement to the License
Agreement for Perfect World2 Online English Version
("Supplementary Agreement") was made and entered by
BPWTC, Level Up and PlayWeb Games, Inc. ("Playweb"); that
pursuant to the Original Agreement, BPWTC appoints Level Up as its
exclusive license of the Game 2 in the Philippines subject to the terms
and conditions of the Original Agreement granting the following
rights:SCIacA
a) the sole, exclusive, sub-licensable, non-assignable and

indivisible license to service, use, promote, market,
distribute, distribute sell and otherwise
Commercialize 3 the Game to Users 4 in the
Philippines;
b) the sole, exclusive, sub-licensable, non-assignable and
indivisible license to develop, design, manufacture,
publish, broadcast, promote, market, distribute offer
for sale or trade, sell or otherwise dispose of the
Game Peripherals 5 in the Philippines at such prices
determined by the Level Up;
c) continued access to improvements in techniques and
processes related to the Game and/or the Game
Peripherals for the duration of the Term;
d) provide maintenance and support service, including but
not restricted to technological
support, software support, client service and online
service, Level Up shall send a report on the
foregoing matters to the designated person of
BPWTC and shall deliver services to Users in
compliance with the client service regulations of
BPWTC which BPWTC has disclosed to Level Up;
e) install, copy, store, edit and modify server-end
programs to provide necessary service;
f) upon consultation with BPWTC, the right to adapt the
Game and/or the Game Peripherals to conditions in
the Philippines and to introduce innovation to them;
and
g) other rights necessary or incidental to enable Level
Up to properly and efficiently exercise its rights and
perform its obligations under the Original
Agreement.
that the Agreement shall commence on the Effective Date 6 plus
consecutive 5 years since the start of the commercial operations for
the Games unless earlier terminated, and will be automatically
renewed for periods of one (1) year; that in consideration of the
grants, Level Up shall make payments of License Fees to BPWTC of
One Hundred Fifty Thousand Dollars ($150,000.00) and Monthly
Running royalties equivalent to twenty two percent (22%) of Game
Service Fee. 7
It is finally represented, based on the Sworn Statement
by Level Up on October 11, 2011, that the transaction subject of the
request for ruling is not under investigation, on-going audit,
administrative protest, claim for refund or issuance of a tax credit
certificate, collection proceedings, or judicial appeal of the taxpayer/s
involved. SATDEI

which accrued on November 4, 2010 and thereafter, any availment of
tax treaty relief (exemption from income tax or reduction of tax) shall
Division ("ITAD") of this Bureau before the first taxable event subject
of the TTRA, to wit:
0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C)
improperly filed.
the TTRA under this RMO." (Emphasis ours)
In relation thereto, Revenue Memorandum Order No.
1-2000 (Procedures for Processing Tax Treaty Relief Application)
("RMO 1-2000"), which covers income derived or accrued before
November 4, 2010, provides that any availment of relief shall
be preceded by an application filed at ITAD at least fifteen days
before the intended transaction or payment of income, thus:
"III. Policies: TCDHaE

following policies shall be observed:
xxx xxx xxx
preceded by an application by filing BIR Form No.
0901 (Application for Relief from Double Taxation)
with ITAD at least 15 days before the transaction
i.e., payment of dividends, royalties, etc.,
accompanied by supporting documents justifying
it ruled:
been successfully invoked. TACEDI

G.R. No. 168531 on February 18, 2008.
In view of the foregoing, since the Agreement that gives rise to
the royalties has been in effect on December 12, 2006, but the TTRA
for this purpose was filed only on December 1, 2011, this Office
hereby DENIES relief on all royalties paid by Level Up to BPWTC on
and before December 1, 2011, pursuant to Section 14 of RMO
72-2010 and Section III (2) of RMO 1-2000. Accordingly, said fees
shall be subject to income tax at the rate of 30 percent under Section
28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax
Code"), as amended, to wit: TAaIDH

—
xxx xxx xxx
thirty percent (30%)." HESIcT
On the other hand, the royalties paid to BPWTC by Level

Up on December 2, 2011 and thereafter are GRANTED relief and are
subject to a reduced tax rate of 10 percent of the gross amount
thereof pursuant to Article 12 of the Philippines-China tax treaty. It
provides:
"Article 12
Royalties
that other State.
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.
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. THaDAE

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
commercial, or scientific equipment, or for information
experience.
xxx xxx xxx"
Moreover, the above royalty payments shall be subject to
value-added tax ("VAT") as provided for in Section 108 of the Tax
Code, as amended, viz.:
services, including the use or lease of properties.
performance of all kinds of services in the Philippines for others
for a fee, . . . . The phrase 'sale or exchange of services' shall
likewise include:
(1) The lease or the use of or the right or privilege to use
any copyright, patent, design or model, plan
secret formula or process, goodwill, trademark,
trade brand or other like property or right; . . ."
CTDacA
With regard to the procedures for the withholding and the

payment of the VAT pursuant to Sections 4 and 6 of Revenue
Regulations No. 4-2002, Section 3 of Revenue Regulations No.
8-2002, and Section 7 of Revenue Regulations No. 14-2002, Level
Up shall be responsible for the withholding of VAT on the royalties
before remitting them to BPWTC. In remitting to the Bureau of
Internal Revenue the VAT withheld, Level Up shall use BIR Form No.
1600 (Monthly Remittance Return of Value-Added Tax & Other
Percentage Taxes Withheld). If it is a VAT-registered taxpayer, Level
Up may use as documentary substantiation for its claim of input VAT
the duly filed BIR Form No. 1600 and the proof of payment
accompanying such form. On the other hand, if it is a non
VAT-registered taxpayer, Level Up may include as part of the cost of
the royalty fees to it by BPWTC the VAT consequently shifted or
passed on to it. In addition, Level Up is required to issue the
Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in
quadruplicate, the first three copies for BPWTC and the fourth copy
for Level Up as its file copy.
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Agreement between the Government of the Republic of the Philippines and
the Government of the People's Republic of China for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect
to Taxes on Income.
2."Game" means object.
3."Commercialize" means to engage in Commercialization.
4."Users" means any person who connects to the network platform provided
by Licensee to play online Game.
5."Game Peripherals" means any tangible, digital or intangible objects or
things related to the Game which are developed by Licensor or by
authorization form Prefect World, including but not limited to, dolls of
Game Characters, stamps about game content, costumes with Game
logos, daily products and items in the game, that are made available
and sold to end users.
6."Effective Date" means the date of the execution of the Agreement by the
Parties.
7."Game Service Fee" means a right bought by a User with money or credits
or disposed of by Licensee in the ordinary course of its business to
play the Game with a certain period of time. The Game Service Fee
shall be denominated and calculated in terms of a certain amount of
money. The carrier of the "Game Service Fee" can be point-counting
card or other applicable means. Prior to start of commercial
operations the Game, an agreement will be reached between the
Parties on a standard for the method of determining the price of the
Game service Fee, including a range or standard acceptable to both
parties. Pursuant to this pricing standard, Licensee can adjust the
amount line variety and price of Game Service Fee at its option and
shall notify Licensor of the same in the monthly work report.
January 31, 2006 Approving the Recommendation of the Secretary of
Finance to Increase the Value Added Tax Rate from Ten Percent to
Twelve Percent) dated January 31, 2006.
||| (ITAD BIR Ruling No. 259-13, [August 27, 2013])
August 23, 2005
ITAD RULING NO. 084-05
Articles 5, 7 & 12
of Philippines-Aust
ralia tax
treaty; Philippines-
Indonesia tax
treaty; Philippines-
Malaysia tax treaty;
and Philippines-Si
ngapore tax treaty;
Articles 5 & 7
of Philippines-Jap
an tax treaty;
Section 28 (B) (1)
& Section 42 (A)
(3) of the Tax
Code of 1997; BIR
Ruling No.
DA-ITAD
24-04; BIR Ruling
No. DA-ITAD
13-05; BIR Ruling
No. DA-ITAD
129-03; BIR
Rulings No.
DA-145-97

20th Flr., Tower 1 The Enterprise Center
6766 Ayala Avenue, Makati City
Attention: Benedicta Du-Baladad

Tax Partner
Gentlemen :
This refers to your letter dated December 23, 2004,

filed on behalf of your client, Philippine Computer
Associates International, Inc. (PCAII), requesting
confirmation of your opinion as follows, to wit:
1. That the service fees paid by PCAII to its "Foreign
Affiliates" namely, Computer Associates PTY
Ltd. of Australia (CAPL-Australia); PT CA
Indonesia of Indonesia (PTCA-Indonesia);
Computer Associates (Malaysia) Sdn Bhd
(CA-Malaysia) and Computer Associates Pte
Ltd. of Singapore (CAPL-Singapore), are in the
nature of business profits under the provisions
of applicable tax treaties where Philippines is a
signatory, and therefore, not subject to
Philippine income tax and consequently to
withholding tax; aDcEIH
2. That the service fees paid by PCAII to Computer

Associates International Ltd. of Hongkong
(CAIL-Hongkong), also a foreign Affiliate, are
exempt from Philippine income tax pursuant to
Section 28(B)1) in relation to Section 42(A)(3),
both of the Tax Code of 1997 and
consequently to withholding tax;
3. That the service fees paid to affiliates under (1)
and (2), are exempt from the 10% VAT if
rendered outside the Philippines;
4. That the reimbursement of costs paid by PCAII to
Computer Associates Japan Ltd. (CA-Japan) is
not subject to income tax, to withholding tax
and to 10% VAT; and
5. That the fees paid in connection with (1) and (2)
above are valid deductions from gross income
for purposes of determining the income tax
liability of PCAII.
It is represented that:
1. CAPL-Australia is a nonresident foreign
corporation duly organized and existing under
the laws of Australia with its principal office
address at 407 Pacific Highway, Artarmon,
NSW, Australia;
2. PTCA-Indonesia is a nonresident foreign
the laws of Indonesia with principal office
address at Wisma 46, Kota BNI, Level
34-05/06, Jl. Jend. Sudirman Kav. l, Jakarta
10220, Indonesia; IDTcHa
3. CA-Malaysia is a nonresident foreign corporation

duly organized and existing under the laws of
Malaysia with principal office address at Level
69, Tower 2, Petronas Twin Towers, KLCC,
50088, Kuala Lumpur, Malaysia;
4. CAPL-Singapore is a nonresident foreign
the laws of Singapore with principal office
address at 9 Temasek Boulevard, #10-01/03
Suntec Tower 2, Singapore;
5. CA-Japan is a nonresident foreign corporation duly
organized and existing under the laws of Japan
with principal office address at 39/F Mitsui
Bldg., Shinjuku Tokyo, Japan; and
6. CAIL-Hong Kong is a nonresident foreign
the laws of Hong Kong with principal office
address at 21/F World Trade Center, 280
Gloucester Road, Causeway Bay, Hong Kong.
that these Foreign Affiliates are not registered either as
corporations or as partnerships licensed to do business in
the Philippines per certifications issued by the Securities
and Exchange Commission dated August 4, 2004 and
November 4, 2004; that PCAII, on the other hand, is
domestic corporation duly organized and existing under the
laws of the Philippines with principal office address at 30/F
Philam Life Tower, 8767 Paseo de Roxas, Salcedo Village,
Makati City; that PCAII is registered with Board of
Investments (BOI) under Certificate of Authority No. 2117
dated July 6, 1990; that it is primarily engaged
in software licensing, and providing maintenance support,
technical and professional services related to
the software licensed from Computer Associates
International, Inc. of Delaware, US; that the Foreign
Affiliates entered into a separate service agreements with
PCAII for management consultancy and support services;
that the specific services and the scope of services to be
rendered by the Foreign Affiliates throughout the term of
their contracts are governed by their respective service
agreement; that like most multi-national companies, the
consultancy and support services of the Foreign Affiliates
are provided within the Computer Associates Group
worldwide; that the services include information and
technology support and consultancy services, including
providing regional pre-sales technical support and regional
professional services in the implementation and installation
of the licensed CA software; that the Foreign Affiliates shall
provide these services outside the Philippines, except only
in respect of activities that its personnel will conduct for
specific services, which require highly qualified and
experienced personnel for short periods of time not
exceeding 183 days; that for the consultancy and support
services, PCAII pays the Foreign Affiliates with the
exception of CA-Japan, on a cost-plus basis with a mark-up
of 10% based on total costs incurred by the affiliates; that in
the case of CA-Japan, the arrangement is purely on a cost
reimbursement basis; and that PCAII receives billings or
invoices from the Foreign Affiliates which serve as proof of
the amount of service fees to be paid by PCAII.
In reply, this Office is of the opinion and so holds that:
1. Payments made by PCAII to its Foreign Affiliates
for services rendered abroad under their respective Service
Contracts, are exempt from Philippine income tax and
consequently to withholding tax under their respective tax
treaties with the Philippines.
Philippines-Australia tax treaty
"Article 5
"1. For the purposes of this Agreement, the
term 'permanent establishment' means a fixed
place of business through which the business of an
enterprise is wholly or partly carried on.
"2. The term 'permanent establishment'
shall include especially —
xxx xxx xxx
k) a place in one of the
Contracting States through which an
enterprise of the other Contracting
State furnishes services, including
consultancy services, for a period or
periods aggregating more than six
months in any taxable year or year of
income, as the case may be, in
relation to a particular project, or to
any project connected therewith.
"xxx xxx xxx"
"Article 7
BUSINESS PROFITS
"1. The profits of an enterprise of one of the
Contracting States shall be taxable only in that
State unless the enterprise carries on business in
the other Contracting State through a permanent
establishment situated therein. If the enterprise
carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State, but only
so much of them as is attributable to —
a) that permanent
establishment; or
"xxx xxx xxx."
Philippines-Indonesia tax treaty
"Article 5
term "permanent establishment" means a fixed
place of business through which the business of
the enterprise is wholly or partly carried on
SEHTAC

includes especially:
xxx xxx xxx
m) the furnishing of services,
including consultancy services by an
enterprise through an employee or
other personnel where activities of
that nature continue (for the same or
connected project) for a period or
periods aggregating more than 183
days within any twelve-month period.
"xxx xxx xxx"
"Article 7
BUSINESS PROFITS
"1. The profits of an enterprise of a
Contracting State shall be taxable only in that State
unless the enterprise carries on business in the
other Contracting State through a permanent
carries on or has carried on business as aforesaid,
the profits of the enterprise may be taxed in the
other State but only so much of them as is
attributable to:
a. that permanent
establishment; or
"xxx xxx xxx."
Philippines-Malaysia tax treaty
"Article 5
place of business in which the business of the
"xxx xxx xxx."
"Article 7
BUSINESS PROFITS
carries on business as aforesaid, the profits of the
enterprise may be taxed in the other State but only
so much thereof as is attributable to that
permanent establishment.
"xxx xxx xxx."
Philippines-Singapore tax treaty
"Article 5
"1. For the purposes of this convention, the
place of business in which the business of the
IcAaEH

includes specially but is not limited to:
"xxx xxx xxx"
j) The furnishing of services,
including consultancy services, by a
resident of one of the Contracting
States through employees or other
personnel, provided activities of that
nature continue (for the same or a
connected project) within the other
Contracting State for a period or
periods aggregating more than 183
days.
"xxx xxx xxx."
"Article 7
BUSINESS PROFITS
carries on or has carried on business as aforesaid,
the profits of the enterprise may be taxed in the
other State but only so much of there as is
attributable to that permanent establishment.
"xxx xxx xxx."
Based on the abovequoted provisions, the income of
these Foreign Affiliates shall be taxable in the Philippines
only if they are deemed to have a permanent establishment
situated in the Philippines as defined under the above
Philippine tax treaties.
Inasmuch as it is represented that the consultancy
and support services to be rendered by these Foreign
Affiliates for PCAII are to be performed outside of the
Philippines except in respect of activities that their
respective personnel will conduct for specific services,
which require highly qualified and experienced personnel
for short periods of time, not exceeding 183 days, the
furnishing of said services by these Foreign Affiliates
through their respective employees or other personnel shall
not constitute carrying of business through a permanent
establishment in the Philippines. Such being the case,
income derived by these Foreign Affiliates which are in the
nature of business profits are not subject to Philippine tax
as defined under the above Philippine tax treaties. (BIR
Ruling No. DA-ITAD 24-04 dated March 11, 2004)
2. That the service fees paid by PCAII to CAIL-Hong
Kong, also a foreign affiliate, are exempt from Philippine
income tax pursuant to Section 28(B)(1) in relation to
Section 42(A)(3), both of the Tax Code of 1997 and
consequently to withholding tax.
In reply, please be informed that Section 28(B)(1) of
the Tax Code provides:
"Section 28. Rates of income Tax on
Foreign Corporations. —
xxx xxx xxx
(B) Tax on Nonresident
Foreign Corporation. —
(1) In General. — Except as
otherwise provided in this Code, a
foreign corporation not engaged in
trade or business in the Philippines
shall pay a tax equal to thirty-five
percent (35%) of the gross income
received during each taxable year
from all sources within the
Philippines, such as interests,
dividends, rents, royalties, salaries,
premiums (except reinsurance
premiums), annuities, emoluments or
other fixed or determinable annual,
periodic or casual gains, profits and
income, and capital gains, except
capital gains subject to tax under
subparagraphs 5(c) and
(d): Provided, That effective January
1, 1998, the rate of income tax shall
be thirty-four percent (34%); effective
January 1, 1999, the rate shall be
thirty-three percent (33%); and,
effective January 1, 2000 and
thereafter, the rate shall be thirty-two
percent (32%).
"xxx xxx xxx."
Furthermore, Section 23(F) of the Tax Code of
1997 provides:
"Section 23. General Principles of Income
Taxation in the Philippines. — Except when
otherwise provided in this Code:
xxx xxx xxx
(F) A foreign corporation,
whether engaged or not in trade or
business in the Philippines, is taxable
only on income derived from sources
within the Philippines.aCSHDI
"xxx xxx xxx"

According to Section 23(F), foreign corporations like
CAIL-Hong Kong are taxable only on income derived from
sources within the Philippines. In the case of income from
the provision of services, such income is considered
derived from sources within the Philippines if the services
are performed in the Philippines, as stated in Section
42(A)(3) of the Tax Code below:
"Section 42. Income from Sources Within
the Philippines. — The following items of gross
income shall be treated as gross income from
sources within the Philippines:
xxx xxx xxx
(3) Services. —
Compensation for labor or personal
services performed in the Philippines;
"xxx xxx xxx"
Accordingly, since the subject services will be carried
out outside the Philippines, service fees therefor to be paid
by PCAII to CAIL-Hong Kong, being income not derived
from sources within the Philippines by foreign corporations,
are therefore exempt from Philippine income tax. (BIR
Ruling No. DA-ITAD 13-05 dated February 16, 2005) IASCTD
3. That the service fees paid to affiliates under (1)

and (2), are exempt from the 10% VAT if rendered outside
the Philippines.
Similarly, the subject fees are not subject to ten
percent (10%) Value-Added Tax (VAT) imposed under
Section 108(A) of the Tax Code below:
"Section 108. Value-Added Tax on Sale of
Services and use or Lease of Properties.
(A) Rate and Base of Tax. — There shall be
levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services,
including the use or lease of properties.
The phrase 'sale or exchange of services'
means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or
consideration . . ."
Section 108(A) clearly states that the sale or
exchange of services subject to VAT include only those
services that are performed in the Philippines. Accordingly,
the service fees to be paid by PCAII to these Foreign
Affiliates to the extent that subject services are not
performed in the Philippines are therefore exempt from VAT.
(BIR Ruling No. DA-ITAD 24-04 dated March 11, 2004)
On the other hand, the fees to be paid by PCAII to
these Foreign Affiliates for the portion of services actually
rendered in the Philippines are subject to 10% value-added
tax (VAT). Accordingly, PCAII, being the resident
withholding agent and payor in control of payment shall be
responsible for the withholding of the 10% final VAT on
such fees before making any payment to these Foreign
Affiliates. In remitting the VAT withheld, PCAII shall use BIR
Form No. 1600 (Monthly Remittance Return of
Value-Added Tax & Other Percentage Taxes Withheld).
The duly filed BIR Form No. 1600 and proof of payment
thereof shall serve as documentary substantiation for the
claim of input tax to be applied against the output tax that
may be due from PCAII if it is a VAT-registered taxpayer. In
case PCAII is a non-VAT registered taxpayer, the
passed-on VAT withheld shall form part of the cost of the
service purchased or treated as "expense" or "asset",
whichever is applicable. In addition, PCAII is required to
issue the Certificate of Creditable Withheld at Source (BIR
Form No. 2307) in quadruplicate upon request of these
Foreign Affiliates, the first three copies thereof be given to
these Foreign Affiliates, respectively, and the fourth copy to
be retained by PCAII. (Sections 4 & 6, Revenue
Regulations (RR) No. 4-2002; Section 3 of RR 8-2002;
Section 7 of RR 14-2002)
4. That royalty fees for the use of the licensed
CA Software, for which services under the subject Service
Contracts are rendered, are subject to income tax under
the Tax Code or relevant tax treaties, as applicable, and to
the value-added tax.
5. That the reimbursement of costs paid by PCAII to
Computer Associates Japan Ltd. (CA-Japan) is not subject
to income tax, to withholding tax and to 10% VAT.
In reply, please be informed that mere
reimbursements of actual expenses/costs without any
mark-up or profit clement do not constitute income
payments and are, therefore, not subject to Philippine
income taxes. (BIR Ruling No. DA-145-97) However,
should the payments constitute business profits, the same
shall be exempt from Philippine income taxes if CA-Japan
does not have a permanent establishment in the Philippines
pursuant to Article 5 in relation to Article 7 of
the Philippines-Japan tax treaty, quoted as follows:
"Article 5
"1. For the purposes of this Convention, the
place of business through which the business of an
xxx xxx xxx
"6. An enterprise of a Contracting State
shall be deemed to have a permanent
establishment in the other Contracting State if it
furnishes in that other Contracting State
consultancy services, or supervisory services in
connection with a contract for a building,
construction or installation project through
employees or other personnel — other than an
agent of an independent status to whom paragraph
7 applies —, provided that such activities continue
(for the same project or two or more connected
projects) for a period or periods aggregating more
than six months within any taxable year. However,
if the furnishing of such services is effected under
an agreement between the Governments of two
Contracting States regarding economic or
technical cooperation, that enterprise shall,
notwithstanding any provisions of this Article, not
be deemed to have a permanent establishment in
that other Contracting State."
"xxx xxx xxx."
6. That the issue on the deductibility of the fees under
numbers (1) and (2) above is a factual issue which this
Office cannot rule upon.
This Office declines to rule on the matter considering
the factual nature of the issue. However, this does not
preclude the taxpayer to treat it as a deductible item, the
allowability of which is subject to the findings of an
investigation pursuant to the substantiation requirements
under Section 34(A)(1)(b) of the National Internal Revenue
Code. (BIR Rulings No. DA-ITAD 129-03 dated August 18,
2003) CAETcH
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.
Very truly yours,

Commissioner of
Internal Revenue
By:
(SGD.) JAMES H.
ROLDAN
Assistant Commissioner
Legal Service
 6
 7
 8
||| (ITAD Ruling No. 084-05, [August 23, 2005])
June 13, 2013
Articles 5 (Permanent
Establishment) and 7
(Business
Profits) Philippines-Singapo
re tax treaty
Geco Asia Pte. Ltd.

8 Boon Lay Way
7-15, 8 @ Tradehub21
Singapore
Attention: Ms. Arlene Tangkay

Gentlemen :

on March 14, 2012 requesting confirmation that service fees paid
by SAP Philippines, Inc. ("SAP Philippines") to Geco Asia Pte. Ltd.
("Geco Asia") are exempt from income tax pursuant to
the Convention between the Republic of the Philippines and the
Republic of Singapore for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on
Income ("Philippines-Singapore tax treaty"). aAHDIc
Facts
Geco Asia is a foreign corporation and a resident of Singapore
based on the Certificate Confirming Incorporation of Company issued
by the Accounting and Corporate Regulatory of Singapore on August
11, 2011, and its Certificate of Residence issued by the Inland
Revenue Authority of Singapore on February 6, 2012. Geco Asia is
located at 8 Boon Lay Way, 7-15, 8 @ Tradehub21, Singapore. It is
not registered as a corporation or partnership in the Philippines
the Securities and Exchange Commission on March 28, 2012. On the
other hand, SAP Philippines is a domestic corporation located at
32nd Floor, Citibank Tower, 8741 Paseo de Roxas, Makati City,
Philippines.
On January 17, 2012, SAP Philippines and Geco Asia entered
into a Statement of Work to SAP Consulting Partner Program
Services Agreement where Geco Asia agreed to provide consultancy
services in the implementation of the SAP Software for Zuellig
Pharma Asia Pacific Ltd. Philippines ROHQ ("Zuellig Pharma
ROHQ"). Zuellig Pharma ROHQ is a client of SAP Philippines located
at 27th Floor, Philippine Axa Life Centre, Sen. Gil Puyat Avenue
corner Tindalo Street, Makati City, Philippines. Geco Asia will
perform the following services:
1. Understand the business process of Zuellig Pharma
ROHQ based on blueprint (global template and
BU-specific).
2. Configure, maintain, test (unit and integ), document and
train users for (a) Make to order, (b) Capacity
leveling, (c) Shift scheduling, and (d) PP material
check availability.
3. Knowledge transfer — PP, QM configuration, standard
reports.
4. User acceptance testing — (support and train users,
project team and resolve issues).
5. Data migration — pre-validation, uploading and post
validation of PP/QM-related data.
In consideration, SAP Philippines will pay service fees to Geco
Asia as indicated in the invoice to be sent by Geco Asia to SAP
Philippines every month. The fees are payable within sixty days from
receipt of the invoice.CIDTcH
Based on the Sworn Statement issued by Geco Asia on

January 31, 2013, the services were rendered in the Philippines by
the following individual:
Personnel Inclusive Dates Number of Days
Rajkumar RajuJan. 24 to Mar. 16, 2012 55 days
Consequently, Geco Asia sent the following invoices to SAP
Philippines:
Invoice Amount of Service
Date of Invoice
Number Fees
(in US Dollars)
March 29, 2012 20120043 7,200.00
March 30, 2012 20120045 13,600.00
March 31, 2012 20120048 9,600.00
March 31, 2012 20120049 8,400.00
–––––––––
38,800.00
========
The service fees of US$37,500.00 (less banking charge of
$25.00) or equivalent to 48,851.50 Singapore dollars were remitted
to Geco Asia through telegraphic transfer on May 25, 2012, as
confirmed by the Credit Advice issued by Maybank on that date.
Ruling
In reply, please be informed that since the relevant TTRA was
filed on March 14, 2012, and the service fees subject of the TTRA
were paid later on May 25, 2012, such fees shall be subject to relief
(exemption from income tax or reduction of tax) pursuant to Section
14 of Revenue Memorandum Order No. 72-2010 (Guidelines on the
Processing of Tax Treaty Relief Applications (TTRA) Pursuant to
Existing Philippine Tax Treaties) ("RMO 72-2010"), which provides:
0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C)
improperly filed.
the occurrence of the first taxable event." (Emphasis ours)
Relative thereto, the service fees paid by SAP
Philippines to Geco Asia are subject to relief under Article 7 of
the Philippines-Singapore tax treaty, which provides:
"Article 7
BUSINESS PROFITS
1. The profits of an enterprise of a Contracting State shall be
taxable only in that State unless the enterprise carries
on business in the other Contracting State through a
permanent establishment situated therein. If the
enterprise carries on or has carried on business as
aforesaid, the profits of the enterprise may be taxed in
the other State but only so much of them as is
attributable to that permanent establishment." cADSCT
Under Article 7, profits derived by an enterprise of Singapore

from sources in the Philippines may be taxed in the Philippines if
attributable to a permanent establishment which the enterprise has in
the Philippines.
In relation thereto, Article 5 of the treaty defines a permanent
establishment as follows:
"Article 5
1. For the purposes of this Convention, the term 'permanent
establishment' means a fixed place of business in which
the business of the enterprise is wholly or partly carried
on.
2. The term 'permanent establishment' includes specially but is
not limited to:
a) A seat of management;
b) A branch;
c) An office;
d) A store or other sales outlet;
e) A factory;
f) A workshop;
g) A warehouse, in relation to a person providing
storage facilities for others;
h) A mine, quarry, or other place of extraction of natural
resources;
i) A building site or construction or assembly project or
installation project or supervisory activities in
connection therewith, provided such site, project
or activity continues for a period more than 183
days; and
j) The furnishing of services, including consultancy
services, by a resident of one of the Contracting
States through employees or other personnel,
provided activities of that nature continue (for the
same or a connected project) within the other
Contracting State for a period or periods
aggregating more than 183 days."
As defined, a permanent establishment means a fixed place of
business through which the business of an enterprise is wholly or
partly carried on, and includes especially, a seat of management, a
branch, an office, a store or other sales outlet, a factory, and a
workshop. It also includes the furnishing of services, including
consultancy services, by an enterprise of a Contracting State
(through employees or other personnel thereof), where such activities
continue (for the same or a connected project) within the other
Contracting State for a period or periods aggregating more than 183
days. caIEAD
Accordingly, since Geco Asia is not engaged in trade or

business in the Philippines to which a branch, an office, or other fixed
place of business is necessary, and since it did not furnish services in
the Philippines for more than 183 days, but for a period of 55 days
only to provide consultancy services in the implementation of the
SAP Software for Zuellig Pharma ROHQ, Geco Asia shall not be
deemed to have a permanent establishment in the Philippines under
these circumstances, pursuant to paragraphs 1 and 2, Article 5 of
the Philippines-Singapore tax treaty. This being the case, the service
fees paid by SAP Philippines to Geco Asia for said services shall
be exempt from income tax, pursuant to paragraph 1, Article 7 of the
treaty.
Furthermore, on the classification of the service fees
as business profits (which are exempt from income tax if not
attributable to a permanent establishment) and not as payments for
know-how or royalties (which are subject to reduced rate of income
tax), the following commentaries of the Organisation for Economic
Co-operation and Development Model Tax Convention on Income
and on Capital (Condensed Version, July 22, 2010) mention that:
"11.1 In the know-how contract, one of the parties agrees to
impart to the other, so that he can use them for his own
account, his special knowledge and experience which
grantor is not required to play any part himself in the
application of the formulas granted to the licensee and
that he does not guarantee the result thereof.
11.2 This type of contract thus differs from contracts for the
provision of services, in which one of the parties
undertakes to use the customary skills of his calling to
execute work himself for the other party. Payments
made under the latter contracts generally fall under
Article 7.
11.3 The need to distinguish these two types of payments, i.e.,
payments for the supply of know-how and payments for
the provision of services, sometimes gives rise to
practical difficulties. The following criteria are relevant
for the purpose of making that distinction:
information of the kind described in paragraph 11
that already exists or concern the supply of that
type of information after its development or
creation and include specific provisions
concerning the confidentiality of that information.
— In the case of contracts for the provision of services,
the supplier undertakes to perform services which
may require the use, by that supplier, of special
knowledge, skill and expertise but not the transfer
of such special knowledge, skill or expertise to
the other party.
— In most cases involving the supply of know-how,
there would generally be very little more which
needs to be done by the supplier under the
contract other than to supply existing information
or reproduce existing material. On the other hand,
a contract for the performance of services would,
in the majority of cases, involve a very much
greater level of expenditure by the supplier in
order to perform his contractual obligations. For
instance, the supplier, depending on the nature of
the services to be rendered, may have to incur
salaries and wages for employees engaged in
researching, designing, testing, drawing and
sub-contractors for the performance of similar
services." (Pages 225-226) TCAHES
Based on the commentaries, in a contract for the supply of

know-how, there would generally be very little more which needs to
be done by the supplier other than to supply existing information or
reproduce existing material. On the other hand, in a contract for the
performance of services, this involves, in a majority of cases, a very
much greater level of expenditure by the supplier in order to perform
his contractual obligations to the other party, such as salaries and
wages for employees engaged in researching, designing, testing,
drawing and other associated activities or payments to
subcontractors for the performance of similar services.
Accordingly, since the Agreement did not require Geco Asia to
supply existing information or reproduce existing material to SAP
Philippines, but to provide consultancy services in the implementation
of the SAP Software for Zuellig Pharma ROHQ, particularly, by
understanding the business process of Zuellig Pharma ROHQ based
on blueprint, and configuring, maintaining, testing, documenting and
training users for this software, among others, the Agreement in
question is clearly a contract for the performance of services
and not for the supply of know-how or other royalty-bearing property.
Moreover, by reason that the services are rendered for a
considerable period of 38 days by a designated personnel of Geco
Asia, it is certain that a greater level of expenditure (such as salaries
and other remuneration of this personnel) is incurred by Geco Asia to
fulfil its contractual obligations to SAP Philippines. This being the
case, the service fees paid by SAP Philippines to Geco
Asia constitute clearly as business profits and not royalties.
Finally, under Section 108 (A) in relation to Section 105 of the
National Internal Revenue Code of 1997, as amended, the service
fees paid to Geco Asia, a nonresident foreign person, for services it
rendered in the Philippines are subject to value-added tax ("VAT"), to
wit:
including the use or lease of properties: Provided,
that the President, upon the recommendation of
the Secretary of Finance, shall, effective January
1, 2006, 1 raise the rate of value-added tax to
twelve percent (12%) . . ."
"SEC. 105. Persons Liable. — Any person who, in the
course of trade or business, sells, barters, exchanges, leases
goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT)
imposed in Sections 106 to 108 of this Code. ScTCIE
The value-added tax is an indirect tax and the amount of
tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic
Act No. 7716.
The phrase 'in the course of trade or business' means
the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a
non-stock, nonprofit private organization (irreSGS Testingtive
of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding,
services as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being
rendered in the course of trade or business."
Relative thereto, SAP Philippines shall withhold VAT on the
service fees at the rate of 12 percent before remitting them to Geco
Asia. SAP Philippines shall use BIR Form No. 1600 (Monthly
Withheld). The duly filed BIR Form No. 1600 and its accompanying
proof of payment shall serve as documentary substantiation for SAP
Philippines's claim of input tax on the fees; otherwise, if it is not a
VAT-registered taxpayer, SAP Philippines may treat the VAT as an
asset or expense, whichever is applicable. VAT withheld shall be
remitted within ten days following the end of the month the
withholding was made. 2
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
Secretary of Finance to Increase the Value Added Tax Rate from Ten
Provisions of Revenue Regulations No. 16-2005, as Amended,
Otherwise Known as the Consolidated Value-Added Tax Regulations
xxx xxx xxx
and
Withheld.
agent.
March 11, 2016

Articles 13 &
23, Philippines-United
States tax treaty; Articles
12 & 22,
Philippines-Czech tax
treaty
Petron Corporation
San Miguel Head Office
Complex No. 40, San Miguel Avenue
Mandaluyong City
Attention: Joel Angelo C. Cruz
AVP-General Counsel and Corporate Secretary
Gentlemen :
This refers to your application for tax treaty relief filed on

December 7, 2011 requesting confirmation that the license fees to be
paid by Petron Corporation ("Petron") to Belco Technologies
Corporation ("Belco USA") are subject to the preferential rate of 10
percent pursuant to the Convention between the Government of the
Republic of the Philippines and the Government of the United States
of America with Respect to Taxes on Income ("Philippines-US tax
treaty") in relation to the Agreement between the Government of the
Republic of the Philippines and the Government of the People's
Republic of China for the Avoidance of Double Taxation and the
Income. ("Philippines-China Republic tax treaty").
Basic Representations
It is represented that Belco USA is a taxpayer of the United
States of America (USA) for the year 2011, as evidenced by a
Certificate dated June 20, 2011 issued by the Department of
Treasury, Internal Revenue Service of USA; that Belco USA is
organized under the General Corporation Law of the State of
Delaware with registered office at the Corporation Trust Center, 1209
Orange Street, City of Wilmington, County of New Castle, Delaware
based on its Certificate of Incorporation; that Belco USA is not
registered either as a corporation or as a partnership in the
Philippines per Certification issued by the Securities and Exchange
Commission dated December 9, 2011; and that, on the other
hand, Petron is a domestic corporation with principal address at San
Miguel Head Office Complex No. 40, San Miguel Avenue,
Mandaluyong City.
It is further represented that on November 17, 2011, Belco
USA and Petron entered into an Agreement for EDV® Wet Scrubbing
System License for the RMP-2 Fluidized Catalytic Cracking Unit
("Agreement") whereby Belco USA shall provide Petron the License
Package for the FCC Flue Gas Scrubber Unit of the Petron Bataan
Refinery Master Plan 2; that in consideration of the
license, Petron shall pay Belco USA $490,000.00 according to the
following schedule:
Percentage Due
upon signing of
10%
the Agreement
upon submission
40%
of P&IDs
upon submission
50%
of PDP books
that Citibank, N.A. effected the following outward remittances

for Petron in favor of Belco USA based on the Certification issued by
Citibank, N.A. dated September 19, 2012:
Date Amount (USD)
3-Jan-12 49,000.00
8-Mar-12 400,000.00
12-Apr-12 245,000.00
It is represented finally, that the issue/s or transaction subject
of the above request for ruling is not under investigation, neither is it
subject of an on-going audit, administrative protest, claim for refund
or issuance of a tax credit certificate, collection proceedings nor a
judicial appeal based on the Sworn Statement issued by the
AVP-General Counsel and Corporate Secretary of Petron dated
December 6, 2011. DETACa
In reply, please be informed that under Section 28 (B) (1) of

the National Internal Revenue Code of 1997 (NIRC of 1997), as
amended. It provides:
Corporations. —
xxx xxx xxx
all sources within the Philippines, such as . . .
royalties . . .: Provided, That effective January 1,
2009, the rate of income tax shall be thirty
percent (30%).
xxx xxx xxx"
However, income derived by Belco USA in the Philippines,
may be exempt from income tax or may be subjected to a preferential
tax rate, if such income, in this case royalties, are excluded from
gross income pursuant to Section 32 (B) (5) of the same Code
provides:
"Sec. 32. Gross Income. —
xxx xxx xxx
shall be exempt from taxation under this Title:
xxx xxx xxx
Government of the Philippines.
xxx xxx xxx"
With respect to a treaty that you invoked the Philippines-United
States tax treaty, Article 13 of which provides:
"3. The term 'royalties' as used in this Article means payments
thereof."HEITAD
In accordance with the foregoing, the Philippines-US tax treaty,

particularly its Article 13, may apply to the subject royalty fees
received by Belco USA under the subject Agreement. Article 13
provides:
"Article 13
Royalties
of a third State.
xxx xxx xxx"
According to paragraph 2 (b) above, royalties arising in the
Philippines and derived by a resident of the United States are subject
to (a) 25 percent of the gross amount of the royalties for royalties in
general, (b) 15 percent of the gross amount of the royalties if they are
paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities, and (c) 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.
Concerning (c) or commonly known as the
"most-favored-nation" tax treatment of royalties, the Supreme Court,
in the case of the Commissioner of Internal Revenue vs. S.C.
Johnson and Son, Inc. and the Court of Appeals (the S.C. Johnson
case), cited two conditions for royalties arising in the Philippines and
derived by a resident of another country (in this case, the United
States) to be subject to a most-favored-nation tax treatment. First, the
royalties derived by the resident of the other country must be of the
same kind as those derived by a resident of the third country, which
are subject of a most-favored-nation tax treatment under the existing
tax treaty between the Philippines and that third country. Second, in
mitigating the effects of double taxation of income derived by its
residents from foreign sources, the mechanism employed by the
other country for this purpose must be the same with that employed
by the third country also, which can be determined by taking into
account and comparing the respective articles on Elimination of
Double Taxation of the tax treaties with the Philippines of the other
country and of the third country.
Pursuant to the "most-favored-nation" clause in Article 13 (2)
(b) (iii) of the Philippines-United States 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 Philippine tax that
may be imposed on royalties of the same kind paid under similar
circumstances to a resident of a third State.
In relation to the most-favored-nation treatment, the Supreme
Court, in Commissioner of Internal Revenue vs. S.C. Johnson and
Son, Inc. and Court of Appeals (G.R. No. 127105 dated June 25,
1999) ("S.C. Johnson case"), required two conditions for this
treatment to apply. First, royalties arising in the Philippines and paid
to a resident of the United States must be of the same class as those
derived in the Philippines by a resident of a third State to which the
tax treaty between the Philippines and the third State subjects such
royalties to a most-favored-nation treatment. Second, in eliminating
or mitigating the effects of double taxation on royalties, the United
States must allow to its resident the same amount of tax credit or
deduction as that allowed by the third State to the latter's resident
against the income tax due of that resident in the third State with
respect to the royalties. Pertinent portion of this ruling reads:
"The purpose of a most favored nation clause is to
grant to the contracting party treatment not less favorable
than that which has been or may be granted to the 'most
favored' among other countries. The most favored nation
clause is intended to establish the principle of equality of
international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges
accorded by either party to those of the most favored nation.
The essence of the principle is to allow the taxpayer in one
state to avail of more liberal provisions granted in another tax
treaty to which the country of residence of such taxpayer is
also a party provided that the subject matter of taxation, in
this case royalty income, is the same as that in the tax treaty
under which the taxpayer is liable. Both Article 13 of
the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West
Germany Tax Treaty, above-quoted, speaks of tax on
royalties for the use of trademark, patent, and technology.
The entitlement of the 10% rate by U.S. firms despite the
absence of a matching credit (20% for royalties) would
derogate from the design behind the most favored nation
clause to grant equality of international treatment since the
tax burden laid upon the income of the investor is not the
same in the two countries. The similarity in the circumstances
of payment of taxes is a condition for the enjoyment of most
the RP-US Tax Treaty does not give a matching tax credit 20
For this purpose, you cite the Philippines-China tax treaty.
Under paragraph 2 (b), Article 12 thereof, royalties (except royalties
for 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) arising in the Philippines and paid to a resident of
China are subject to income tax at the rate of 10 percent, provided
the contract giving rise to the royalties has been approved by the
Philippine competent authorities, to wit:
"Article 12
Royalties
that other State.
exceed:
broadcasting, or
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. ATICcS
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."
Concerning the first requirement, royalties for the use of the
Payless ShoeSource System and the Marks, being essentially
royalties for the use of trade mark, design, model or plan, are within
the definition of royalties under the Royalties article of the
Philippines-United States and the Philippines-China tax treaties, to
wit:
United States:
thereof."
China:
"3. The term 'royalties' as used in this Article means payments
or tapes for radio or television broadcasting, any
formula or process, or for the use of, or the right to use,
industrial, commercial, or scientific equipment, or for
scientific experience."
Concerning the second requirement, under the Relief from
Double Taxation article of these treaties, income tax paid or withheld
in the Philippines on royalties arising therein and paid to a resident of
the United States and a resident of China is allowed as a tax credit or
deduction against the income tax of these residents in their
respective countries, to wit;
United States:
"Article 23
following manner:
taxes paid or accrued to the Philippines. . ."
China:
"Article 23
Methods for the Elimination of Double Taxation
1. In China, double taxation shall be eliminated as follows:
Where a resident of China derives income from the Philippines
the amount of tax on that income payable in the
Philippines in accordance with the provisions of this
Agreement, may be credited against the Chinese tax
imposed on that resident. The amount of the credit,
however, shall not exceed the amount of the Chinese
tax on that income computed in accordance with the
taxation laws and regulations of China."
Based on the foregoing, this Office is of the opinion and so
holds that the license fees to be paid by Petron to Belco USA under
the Agreement are subject to 10 percent income tax rate based on
the gross amount thereof, under Article 13 (2) (b) (iii) of
the Philippines-United States tax treaty, in relation to Article 12 (2) (a)
of the Philippines-China tax treaty.
Moreover, the said royalty payments by Petron to Belco
USA being payments for the lease or the use of or the right or
privilege to use a copyright in the software in the Philippines, shall be
subject to the 12% value-added tax (VAT) under Section 108 of
the Tax Code of 1997, as amended. Accordingly, Petron, being the
resident withholding agent and payor in control of the payment, shall
be responsible for the withholding of the 12% final VAT on
such royalty before making any payment to Belco USA. In remitting
the VAT withheld, Petron shall use BIR Form No. 1600 (Monthly
Withheld). The duly filed BIR Form No. 1600 and proof of payment
thereof shall serve as documentary substantiation for the claim of
input tax by Petron upon filing its own VAT return, if it is a
VAT-registered taxpayer. In case Petron is a non-VAT registered
taxpayer, the passed-on VAT withheld shall form part of the cost of
goods or properties purchased which may be treated as an "expense"
or as an "asset", whichever is applicable. In addition, Petron is
required to issue the Certificate of Final Tax Withheld at Source (BIR
Form No. 2306) in quadruplicate, the first three copies thereof to be
given to Belco USA upon its request and the fourth copy to be
retained by Petron as its file copy. [Section 4.110.3 (b), Revenue
Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section
4.114-2, RR 16-05); Section 4.114 (d), as last amended by RR 28-03]
However, if upon investigation, it shall be disclosed that the actual
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
||| (ITAD BIR Ruling No. 015-16, [March 11, 2016])
November 7, 2013
Article
12, Philippines-Switzerlan
d tax treaty; Section 28 (B)
(1) in relation to Section 32
(B) (5) of the Tax Code of
1997, as amended
Isla Lipana & Co.

29th Floor, Philamlife Tower
8767 Paseo de Roxas, Makati City
Attention: Maria Carmelita V. Torres

Manager, Tax
Gentlemen :
This refers to your tax treaty relief application filed on February

5, 2013 requesting confirmation that the franchise fee payments
made by Holcim Philippines, Inc. ("Holcim PH") to Holcim Technology
Ltd. ("Holcim CH") are subject to preferential tax rate of 15 percent
pursuant to the Convention between the Republic of the Philippines
and the Swiss Confederation for the Avoidance of Double Taxation
with Respect to Taxes on Income ("Philippines-Switzerland tax
treaty").CDHAcI
It is represented that Holcim CH is a resident of Switzerland
with address at Zurcherstrasse 156 CH — 8645 Jona, based on the
Certificate of Fiscal Residence dated January 29, 2013, issued by the
tax authority of Switzerland; that Holcim CH is not registered as a
corporation or as a partnership in the Philippines based on the
Certification of Non-Registration of Company issued by the Securities
and Exchange Commission dated January 25, 2013; and that on the
other hand, Holcim PH is a domestic corporation with address at 7th
Floor, Two World Square, McKinley Hill, Fort Bonifacio, Taguig City.
It is further represented that on September 19, 2012, Holcim
CH and Holcim PH entered into a Franchising Agreement
("Agreement") whereby Holcim CH granted Holcim PH a
non-exclusive right to use the Business Concept which is a bundle of
inseparably linked intangible rights and intangible property which,
when used all together in the manner in which it has been done
directly or indirectly by Holcim CH in the past, results in a precise and
defined business operation model, within the Philippines for the
operation of Holcim PH's business; that such Business Concept shall
include the trademarks and other registered and unregistered
marketing intellectual property rights, technology and know-how; that
for and in consideration of said license, Holcim PH shall pay Holcim
CH a franchise fee to be calculated in accordance with the following
formula:
Franchise Fee = Net Sales * Franchise Rate
that the effective date of the Agreement shall be on January 1,
2013 and shall remain in force until terminated; and that the first
payment was made on May 7, 2013 based on the Certification issued
by Standard Chartered Bank on May 11, 2013.
It is finally represented that the subject income payments are
not under investigation, on-going audit, administrative protest, claim
for refund or issuance of a tax credit certificate, collection
proceedings, or a judicial appeal based on the Certification issued
by Holcim PH on January 25, 2013.
In reply, please be informed that royalties payable to a foreign
corporation not engaged in trade or business in the Philippines, are
subject to income tax at a rate of 30 percent Section 28 (B) (1) of the
provides:
"SEC. 28. Rate of Income Tax on Foreign Corporations.
—...
thirty percent (30%)." IHaECA
However, such royalties may be exempt or subject to a

reduced rate to the extent required by any treaty obligation on the
Philippines. Section 32 (B) (5) of the Code provides:
xxx xxx xxx
(5) Income Exempt under Treaty. — Income of any kind,
to the extent required by any treaty obligation binding
upon the Government of the Philippines."
Thus, you invoke the Philippines-Switzerland tax treaty.
With respect to royalties, Paragraphs 1, 2, and 3 Article 12
thereof provide:
"Article 12
Royalties
other State.
2. However, the royalties may also be taxed in the
Contracting State in which they arise and according to the laws
of that State, but the tax so charged shall not exceed 15 per
cent of the gross amount of the royalties.
work including cinematographic films and films and tapes for
television or radio broadcasting, any patent, trademark, design
or model, plan, secret formula or process, or for information
concerning industrial, commercial or scientific experience." HTCDcS
Under tax treaties, payments for the supply of services are

treated as business profits, unless they are otherwise treated as
royalties when they concern the use of know-how or any other
intangible property (copyright, patent, trademark, design or model,
plan, secret formula or process design). To distinguish between
payments for the supply of services and payments for know-how, the
following commentaries of the Organisation for Economic
Co-operation and Development ("OECD") Model Tax Convention on
Income and on Capital (Condensed Version, July 2010) mention:
"11.1. In the know-how contract, one of the parties
remain unrevealed to the public. It is recognized that the
11.2. This type of contract thus differs from contracts for
11.3. The need to distinguish these two types of
purpose of making that distinction:
information of that kind described in paragraph 11 that
information.
the supplier undertakes to perform services which may
require the use, by that supplier, of special knowledge,
skill and expertise but not the transfer of such special
knowledge, skill or expertise to the other party. EIASDT

there would generally be very little more which needs to
be done by the supplier under the contract other than to
supply existing information or reproduce existing
material. On the other hand, a contract for the
performance of services would, in the majority of
cases, involve a very much greater level of expenditure
by the supplier in order to perform his contractual
obligations. For instance, the supplier, depending on the
nature of the services to be rendered, may have to incur
researching, designing, testing, drawing and other
associated activities or payments to sub-contractors for
the performance of similar services.
— payments obtained as consideration for after-sales
service,
— payments for services rendered by a seller to the
purchaser under a warranty,
— payments for pure technical assistance,
— payments for a list of potential customers, when such
a list is developed specifically for the payer out of
generally available information (a payment for the
provided a particular product or service would, however,
these customers),
— payments for an opinion given by an engineer, an
advocate or an accountant, and
— payments for advice provided electronically, for
electronic communications with technicians or for
common problems that arise frequently." (Pages
225-226) HSCcTD
In this case, payments under the Agreement concern

information of that kind described in paragraph 11 quoted above
which already exists or concern the supply of that type of information
after its development or creation and include specific provisions
concerning the confidentiality of that information and that there would
generally be very little more which needs to be done by Holcim
CH under the Agreement other than to supply existing information or
reproduce existing material and will not involve a very much greater
level of expenditure by Holcim PH in order to perform his contractual
obligations.
Under paragraph 2 of Article 12 of the Philippines-Switzerland
tax treaty, royalties arising in the Philippines and paid to a resident of
Switzerland may be taxed in the Philippines at a rate not to exceed 15
percent of the gross amount of the royalties. Under paragraph 3 of
Article 12, the term Royalties 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 and
films and tapes for television or radio broadcasting, any patent,
trademark, design or model, plan, secret formula or process, or for
information concerning industrial, commercial or scientific
experience.
Accordingly, the franchise fees made by Holcim PH to Holcim
CH under the Agreement shall be subject to 15 percent of the gross
amount of the royalties based on paragraph 2 of Article 12 of
the Philippines-Switzerland tax treaty.
Furthermore, the royalty payments made by Holcim PH are
subject to the 12% value-added tax (VAT) pursuant to Section 108
of the National Internal Revenue Code of 1997, as amended.
Accordingly, Holcim PH, being the payor in control of the payment
shall be responsible for the withholding of VAT on the
said royalty payments on behalf of Holcim CH by filing a separate
VAT return for and on behalf of Holcim CH using BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax and Other
Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof
of payment thereof shall serve as sufficient basis for the claim of input
tax to be applied against the output tax that may be due from Holcim
PH, if it is a VAT registered taxpayer. In case Holcim PH is a
non-VAT registered taxpayer, the passed-on VAT withheld shall form
part of the cost of the service purchased or treated as an "expense"
or an "asset", whichever is applicable. In addition, Holcim PH is
required to issue the Certificate of Final Tax Withheld at Source (BIR
given to Holcim CH upon its request, and the fourth copy to be
retained by Holcim PH as its copy. [Section 4.110.3 (b), Revenue
4.114-2, RR 16-05, as amended by RR 04-07)]
insofar as the herein parties are concerned. TaHDAS
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
||| (ITAD BIR Ruling No. 305-13, [November 7, 2013])
January 10, 2012

Article
12, Philippines-Finland tax
treaty
KPI Elevators, Inc.

2nd Floor King's Court 2 Building
2129 Chino Roces Avenue
1231 Makati City
Attention: Ms. Melissa Navarro

Accounting Manager
Gentlemen :
This refers to your tax treaty relief application ("TTRA") filed on

May 27, 2011, requesting confirmation that royalties to be paid
by KPI Elevators, Inc. ("KPI Elevators") to Kone
Corporation ("Kone") are subject to 25 percent preferential tax rate
pursuant to the Convention Between the Republic of the Philippines
and the Republic of Finland for the Avoidance of Double Taxation and
Income ("Philippines-Finland tax treaty").
It is represented that Kone is a corporation organized and
existing under the laws of Finland and is a resident thereof based on
the Certificate of Fiscal Residence issued by the Large Tax Office of
Finland; that it is not registered either as a corporation or as a
partnership based on the certification issued by the Securities and
Exchange Commission dated May 25, 2011; and that KPI
Elevators, on the other hand, is a corporation duly organized and
existing under the laws of the Philippines, with principal office at 2nd
Floor, King's Court 2 Building, 2129 Chino Roces Avenue, Makati
City, Philippines.
It is further represented that on January 1, 2009, Kone and KPI
Elevators entered into a Franchise Fee
Agreement ("Agreement") whereby the former granted to the latter a
non-exclusive license (sub-license as the case may be) to use the
following:
1. Kone Technology:
2. Know-How — means the body of knowledge, technical
experience, skills, methods, processes, tools,
technical and confidential information;
3. Show-How — means practical advice and support to be
provided by Kone to enable sale, installation,
maintenance, modernization and repairing of
elevators, escalators, autowalks and automated
doors in its territory;
4. Trade Marks — means the trade marks, service marks,
logos, trade or business names and any application
for any of the foregoing; and
5. IT systems — means a) any software, hardware or
systems and related documentation in relation to
which Kone owns the Intellectual Property rights
provided or made available to KPI Elevators; b) any
developments or modifications made to
such software, hardware or systems by any
company within the Kone Group or otherwise and in
relation to which Kone owns the Intellectual
Property Rights; c) any associated processes. DHACES
for the conduct of the latter's business; that Kone likewise granted a
non-exclusive access to use the Third Party Systems 1 for the
conduct of its business; that in consideration of the license and other
grants by Kone to KPI Elevators, the latter agreed to pay the former a
franchise fee, which will be calculated under the Arm's Length
Principle as a percentage of KPI Elevator's net sales, benchmarked
by reference to analogous third party arrangements, and the parties
agree to the benchmarked rate; that this Agreement shall remain in
effect through December 31, 2009; and that the Agreement shall be
renewed automatically for successive one-year periods thereafter
unless either party shall, at least 30 days before the end of the initial
term or any subsequent one-year period thereafter, give written
notice to the other of its desire to terminate the Agreement.
It is finally represented that the royalties subject of the
application are not under investigation, on-going audit, administrative
protest, claim for refund or issuance of a tax credit certificate,
collection proceedings, or judicial appeal, based on the Certification
issued by the Accounting Manager of KPI Elevators on May 18, 2011.
In reply, please be informed that Sections 14 and 13
of Revenue Memorandum Order ("RMO") No. 72-2010 2 which was
published in the Manila Bulletin on October 20, 2010, and effective
November 4, 2010, provide that:
"Section 14. When and Where to File the TTRA. —
0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and
improperly filed.
the TTRA under this RMO." (Emphasis Supplied)
of RMO No. 1-00 (Procedures for Processing Tax Treaty Relief
Application) ("RMO 1-2000"), any availment of tax treaty relief
(exemption from income tax or reduction of tax) shall be preceded by
an application filed at the International Tax Affairs Division ("ITAD") of
this Bureau at least 15 days before the intended transaction or
payment of income, thus:
"III. Policies:
xxx xxx xxx
the relief . . ." (Emphasis ours)
it ruled:
been successfully invoked. aTcIEH

This decision was also upheld by the Supreme Court in a
Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009),
CBK Power Company Ltd. vs. Commissioner of Internal Revenue
(C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29,
2010) and Manila North Tollways Corporation vs. Commissioner of
Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). cHCaIE
In view of the foregoing, with respect to those royalties paid

by KPI Elevators to Kone prior to the filing of the TTRA,
specifically from January 2009 up to May 27, 2011, this Office hereby
DENIES the use of preferential rate since the TTRA was filed beyond
the 15-day period prescribed by the RMO. Accordingly, the said
royalties shall be subject to income tax at the rate of 30 percent as
provided under Section 28 (B) (1) of the 1997 National Internal
Revenue Code, as amended.
However, the royalties paid by KPI Elevators to Kone from May
28, 2011 may qualify for preferential tax rate under Article 12 of
the Philippines-Finland tax treaty. It provides:
"Article 12
ROYALTIES
other State, if such resident is the beneficial owner of the
royalties.
State in which they arise, and according to the law of that State.
However, the tax so charged shall not exceed:
a) 15 percent of the gross amount of the royalties,
where the royalties are paid by an enterprise registered
with and engaged in preferred areas of activities, and
also royalties in respect of cinematographic films or
tapes for television or broadcasting, and royalties for the
use of, or the right to use, any copyright of literary,
artistic or scientific work; and
b) in all other cases, 25 percent of the gross
amount of the royalties.
xxx xxx xxx"
Under paragraph 1, Article 12 of the Philippines-Finland tax
treaty, royalties paid by KPI Elevators to Kone may be taxed in
Finland, the country where Kone, the beneficial owner of the royalties,
is a resident. Paragraph 2 of the same Article provides that the
subject royalties may likewise be taxed in the Philippines, where they
arise, but the tax so charged shall not exceed: (a) 15 percent of the
gross amount of the royalties if they are paid (i) by an enterprise
registered with and engaged in preferred areas of activities, (ii) in
respect of cinematographic films or tapes for television or
broadcasting, or (iii) for the use or the right to use of a copyright of
literary, artistic or scientific work; and (b) 25 percent of the gross
amount of the royalties in all other cases.
Accordingly, the royalties to be paid by KPI
Elevators to Kone from May 28, 2011 under the Franchise Fee
Agreement, being essentially royalties for the use or the right to use
of trademark, patent, design, and utility model rights, are subject to
preferential rate of 25 percent of the gross amount thereof.
Moreover, the above royalty payments shall be subject to
value-added tax ("VAT") as provided for in Section 108 of the Tax
Code, as amended, viz.:
percent (10%) 3 of gross receipts derived from the sale or
exchange of services, including the use or lease of properties.
for a fee, . . . . The phrase 'sale or exchange of services' shall
likewise include:
(1) The lease or the use of or the right or privilege
to use any copyright, patent, design or model, plan
secret formula or process, goodwill, trademark, trade
brand or other like property or right; . . ."
payment of the VAT, KPI Elevators, being the resident withholding
agent and payor in control of payment, shall be responsible for the
withholding of the final VAT on such fees before making any payment
to Kone. In remitting the VAT withheld, KPI Elevators shall use BIR
Form No. 1600 (Monthly Remittance Return of Value-Added Tax &
Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600
and the proof of payment thereof shall serve as documentary
substantiation for the claim of input tax to be applied against the
output tax that may be due from KPI Elevators if it is a VAT-registered
taxpayer. In case KPI Elevators is not VAT-registered, the passed-on
VAT withheld shall form part of the cost of the service purchased and
may treat such VAT as an "expense" or as an "asset", whichever is
applicable. In addition, KPI Elevators is required to issue in
quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form
No. 2306) in quadruplicate, the first three copies for Kone and the
fourth copy for KPI Elevators as its file copy. (Sections 4 &
6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002;
Section 7 of RR 14-2002) caHCSD

Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Third Party Systems mean a software, hardware or systems and related
documentation in relation to which a third party owns the Intellectual
Property Rights provided or made available to KPI Elevators by Kone
in accordance with this Agreement and in relation to which Kone has
the right to sub-license the right to use that system to KPI Elevators.
2.Guidelines on the Processing of Tax Treaty Relief Applications pursuant to
existing Philippine Tax Treaties dated August 25, 2010.
||| (ITAD BIR Ruling No. 002-12, [January 10, 2012])
April 4, 2016
Article
12, Philippines-Japan tax
treaty
Punongbayan and Araullo

20th Floor, Tower 1
The Enterprise Center
6766 Ayala Avenue
Makati City
Attention: Mr. Edward L. Roguel
Partner, Tax Advisory and Compliance
Gentlemen :
This refers to your tax treaty relief application filed on April 5,

2011 requesting confirmation that royalties paid by Furukawa Electric
Autoparts Philippines, Inc. ("Furukawa Philippines") to Furukawa
Electric Company Ltd. ("Furukawa") are subject to income tax rate of
10 percent pursuant to the Convention between the Republic of the
Philippines and Japan for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income
("Philippines-Japan tax treaty"). 1
Facts
Furukawa is a foreign corporation organized and existing under
the laws of Japan and a resident thereof based on its Certificate of
Residence issued by the Kojimachi Tax Office December 18, 2009. It
manufactures and sells products related to telecommunications
(optical fiber cables, metal communication cables, semiconductor
optical devices); energy and industry (copper wires and aluminum
wires, power transmission cable, insulated wires); electronics and
automotive systems (automotive components and wiring harness,
magnet wires, electronic component materials); and metals (copper
and copper alloy, functional surface products, electrodeposited
copper foil) and in providing logistics, IT processing services,
and software development. Furukawa is registered with the
Securities and Exchange Commission based on the Certificate
issued by SEC on December 22, 2009. Based on the Affidavit issued
by Furukawa on December 9, 2010, Furukawa had a branch office in
the Philippines which had not been operating since August 15, 2001.
It also had a representative office in the Philippines which had not
been operating since April 30, 2002. On the other hand, Furukawa
Philippines is a domestic corporation organized and existing under
the laws of the Philippines. Furukawa Philippines is registered with
the Philippine Economic Zone Authority ("PEZA") engaged in the
manufacture and assembly of various automotive parts such as
steering roll connectors, connector models, relay box assembly parts,
rotator, stator, sub-stator, stator housing, cancel cam, flexible flat
cable assembly, junction box, and battery statement sensor. AScHCD
On May 13, 1998, Furukawa

Philippines and Furukawa entered into a Technical Assistance
Agreement where Furukawa granted an exclusive license
to Furukawa Philippines to manufacture in the Philippines steering
roll connectors (contract products) designed by Furukawa and by
using the latter's technical knowledge, experience, know-how and
other information, including drawings, data, specifications and
manuals. These information concern the processes for manufacture
of the contract products, ranging between the main body assembly,
inspection, and testing, and the machinery, apparatus, and raw
materials for use in the processes. Furukawa has long engaged in
the commercial manufacture in Japan of the contract products and
has substantial amount of technical information and know-how in
respect thereof. Furukawa Philippines is desirous to receive such
information and know-how in order to start the production of the
contract products. In consideration, Furukawa Philippines will
pay Furukawa a running royalty of 1 percent on the net sales prices
of the contract products or fair market value of the products sold
by Furukawa Philippines during the period of the Agreement. The
running royalty shall become due and payable when the invoice of
the contract products is made out by Furukawa Philippines for its
customers, which shall be on or before the day of February and the
last day of August of each year. The royalties shall be paid thru
telegraphic transfer in US dollars into Furukawa's bank account in
Japan. The Agreement took effect on May 13, 1998, and shall
continue to be in effect for a period of 10 years.
The Agreement was amended on February 12, 2000 for the
purpose of amending the royalty rate to 5 percent, which took effect
on January 1, 2000. The Agreement was again amended on
November 15, 2000 for the purpose of amending the payment of
royalties on or before the last day of February, May, August and
November of each calendar year. The amendment took effect on
October 1, 2000. The Agreement was amended for the third time on
April 30, 2008 for the purpose of extending the Agreement after the
lapse of ten years where it shall be automatically and indefinitely
extended for every three-year period. The amendment took effect on
April 30, 2008.
Based on the Certification issued by Furukawa Philippines on
November 16, 2009, February 11, 2015, the income subject of this
ruling is not under investigation, on-going audit, administrative protest,
proceeding, or judicial appeal.
Ruling
In reply, please be informed that under Section 28 (B) (1) of
the National Internal Revenue Code of 1997, as amended ("Tax
Code"), income derived in the Philippines by a foreign corporation not
engaged in trade or business is subject to income tax at the rate of 30
percent, to wit:
Corporations. —
xxx xxx xxx
5(c) and (d) above:n Provided, That effective
However, under Section 32 (B) (5) of the Tax Code, the income
is exempt or partially exempt to the extent required by any treaty
obligation on the Philippines, to wit:
xxx xxx xxx
xxx xxx xxx
to the extent required by any treaty obligation
binding upon the Government of the Philippines."
For this purpose, Article 12 of the Philippines-Japan tax
treaty provides relief to royalties as follows:
"Article 12
that other Contracting State.
Contracting State in which they arise, and according to
the laws of that Contracting State, but if the recipient is
the beneficial owner of the royalties the tax so charged
shall not exceed: AcICHD
a) 15 per cent of the gross amount of the royalties if the

royalties are paid in respect of the use of or the
right to use cinematograph films and films or
b) 10 per cent of the gross amount of the royalties in all
other cases.
xxx xxx xxx
scientific work including cinematograph films and films
experience."
Under this article, the royalties may be taxed in the Philippines
at a rate not to exceed (a) 15 percent if the royalties are for of the use
of, or the right to use, cinematograph films and films or tapes for radio
or television broadcasting, and (b) 10 percent in all other cases.
Intangible properties within item (b) are copyright of literary, artistic or
scientific work (except including cinematograph films and films or
tapes for radio or television broadcasting); patent; trade mark; design
or model; plan; secret formula or process; industrial, commercial or
scientific equipment; and information concerning industrial,
commercial or scientific experience.
Accordingly, since technical knowledge, experience, know-how
and other information used by Furukawa Philippines to manufacture
steering roll connectors are not in the category of cinematograph
films and films or tapes for radio or television broadcasting,
but information concerning industrial, commercial or scientific
experience or know-how, royalties paid by Furukawa
Philippines to Furukawa for the use of this know-how are subject to
income tax at the rate of 10 percent, pursuant to paragraph 2 (b),
Article 12 of the Philippines-Japan tax treaty.
With respect to value-added tax ("VAT"), Section 108 (A) of
the Tax Code subjects to VAT payments for the use or lease of
know-how, to wit:
properties selling price or gross value in money of the
goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: Provided, that
the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, 2 raise the rate of value-added tax to twelve
percent (12%) . . . "
However, the Supreme Court ruled in Commissioner of Internal
Revenue vs. Seagate Technology (Philippines) (G.R. No. 153866
dated February 11, 2005) that:
and regulations.
charged for the VAT on its sales nor indirectly made to bear,
as added cost to such sales, the equivalent VAT on its
purchases. Ubi lex non distinguit, nec nos distinguere
debemus. Where the law does not distinguish, we ought not
to distinguish.
Moreover, the exemption is both express and
pervasive for the following reasons:
First, RA 7916 states that 'no taxes, local and national,
shall be imposed on business establishments operating
within the ecozone.' Since this law does not exclude the VAT
from the prohibition, it is deemed included. Exceptio firmat
regulam in casibus non exceptis. An exception confirms the
rule in cases not excepted; that is, a thing not being excepted
must be regarded as coming within the purview of the general
rule.
circumvention of the law. That no VAT shall be imposed
directly upon business establishments operating within the
ecozone under RA 7916 also means that no VAT may be
passed on and imposed indirectly. Quando aliquid prohibetur
ex directo prohibetur et per obliquum. When anything is
prohibited directly, it is also prohibited indirectly."
Accordingly, since Furukawa, the licensor, is a nonresident
foreign person and not a VAT-registered taxpayer to begin with,
royalties paid to it by Furukawa Philippines, a PEZA-registered entity,
is treated as VAT-exempt and not as VAT zero-rated transaction. In
either case, no output VAT is shifted or passed-on to Furukawa
Philippines in the payment of the royalties. 3
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
1.As amended by the Protocol Amending the Convention between the
Republic of the Philippines and Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income effective January 1, 2009.
2.The VAT rate is increased to 12 percent beginning February 1, 2006, in
3.Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax
Regulations of 2005), as amended, provides:
"SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. — A zero-rated
sale of goods or properties (by a VAT-registered person) is a
taxable transaction for VAT purposes, but shall not result in any
output tax. However, the input tax on purchases of goods,
properties or services related to such zero-rated sale, shall be
available as tax credit or refund in accordance with these
Regulations."
"SEC. 4.109-1. VAT-Exempt Transactions. —
(A) In general. — 'VAT-exempt transactions' refer to the sale of goods or
properties and/or services and the use or lease of properties that is
not subject to VAT (output tax) and the seller is not allowed any tax
credit of VAT (input tax) on purchases.
The person making the exempt sale of goods, properties or services shall
not bill any output tax to his customers because the said
transaction is not subject to VAT."
n Note from the Publisher: The phrase "and (d) above" no longer appears
in RA 9337, the law amending this provision.
||| (ITAD BIR Ruling No. 042-16, [April 4, 2016])
July 27, 2015
Article 12 and Article 7 in

relation to Article
5, Philippines-Singapore
Tax Treaty
Calalang Law Office

Unit 1401, 14th Floor España Tower
España, Manila
Attention: Atty. Ciriaco S. Calalang
Gentlemen :
This refers to your tax treaty relief application filed on
September 28, 2011 requesting confirmation that: (1) royalty fees
paid by NORTH WING FUSION FOOD, INC. ("North Wing") to THAI
EXPRESS CONCEPTS PTE. LTD. ("Thai Express") are subject to
preferential tax rate of 25 percent pursuant to Article 12 (2) (c) of
the Convention between the Republic of the Philippines and the
Republic of Singapore for the Avoidance of Double Taxation and the
Income ("Philippines-Singapore tax treaty"); (2) and the service fees
paid by Thai Express to Thai Express are in the nature of business
profits and are therefore exempt from Philippine income tax pursuant
to Article 7, in relation to Article 5, of the same tax treaty.
HTcADC
Facts
It is represented that Thai Express is a corporation organized
and existing under the laws of Singapore and is a resident thereof
based on the Certificate of Residence issued by the Inland Revenue
Authority of Singapore on January 3, 2012; that Thai Express is
located at 2 Alexandra Road #05-04/05 Delta House Singapore
159919; that Thai Express is not registered as corporation or
partnership in the Philippines based on the Certificate of
Commission on October 19, 2011; and that North Wing is a domestic
corporation situated at 21 A. Roces Avenue, Paligsahan, Quezon
City, Philippines primarily engage in operating restaurants, acquiring
and holding franchise for sub-franchising and managing restaurants.
It is further represented that on September 27, 2011, Thai
Express and North Wing entered into a Master Franchise
Development Agreement ("Agreement"); that Thai Express is the
owner of the trade name and trademark "Xin Wang Hong Kong Cafe"
and certain related trade names, trademarks, service marks,
logotypes, insignias and designs; that Thai Express granted North
Wing limited and qualified right, on an equity-owned and/or on a
sub-franchise basis, to develop Restaurants in the Philippines subject
to the compliance of the terms under the Agreement; that the
Agreement shall have an initial term of ten (10) years commencing on
September 27, 2011 and ending on the date falling ten years
thereafter; that in consideration thereof, North Wing agrees to
pay Thai Express the following fees:
1) Royalty fee on the franchise fee of US$3,375 for each
Restaurant opened during the first five (5) years of the
Agreement for the use of trademarks, proprietary marks
and the System;
2) Market Launch Fee for the marketing service provisions
including the set-up provisions for the launching of the
restaurant, management systems and procedures, back
office process service operation, provision of trainings
and instructions to the management staff and kitchen
staff, and technical assistance in market launching of the
restaurants;
3) Store Opening Fee for the technical assistance in selecting
location for opening restaurant; and
4) Advertising Expenditure for the service provision in taking
in-charge over the advertising requirements (i.e., yellow
page advertising requirements, minimum advertising
weight by market) and the grand opening campaign in
the market. aScITE
It is finally represented that the fees subject of the application

the Managing Director of North Wing on November 12, 2011.
Ruling
In reply, please be informed that Section 28 (B) (1) of
the National Internal Revenue Code ("Tax Code") of 1997, as
amended, provides that the fees paid to Thai Express, being a
foreign corporation not engaged in trade or business in the
Philippines, are subject to income tax in the Philippines at the rate of
30 percent, thus:
Corporations. —
xxx xxx xxx
5(c) and (d): n Provided, That effective January 1,
percent (30%). HEITAD
xxx xxx xxx"

However, under Section 32 (B) (5) of the Code, such fees may
be exempt from income tax or subject to a reduced rate to the extent
required by any treaty obligation on the Philippines, thus:
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
You invoke relief under the Philippines-Singapore tax treaty.
Inasmuch as the contract giving rise to the payments is a
franchise agreement, which in nature is a mixed contract, the relevant
provisions of the Philippines-Singapore tax treaty are found in Article
12 (Royalties) and Article 7 (Business Profits), in relation to Article 5
(Permanent Establishment).
Paragraph (2) (b) of Article 12 of the treaty states: ATICcS
"Article 12
Royalties
that other State.
the law of that State, but, if the recipient is the beneficial
exceed:
a) in the case of the Philippines, 15 per cent of the gross
amount of the royalties, where the royalties are
paid by an enterprise registered with the
Philippine Board of Investments and engaged in
preferred areas of activities and also royalties in
respect of cinematographic films or tapes for
television or broadcasting;
b) in the case of Singapore, where the royalties are
approved under the Economic Expansion
Incentives (Relief from Income Tax) Act of
Singapore, the royalties shall be exempt;
c) in all other cases, 25 per cent of the gross amount of
the royalties.
3. The term "royalties" as used in this Article means payments
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.TIADCc
xxx xxx xxx"

Based on the foregoing provisions, royalties arising in the
Philippines and paid to a resident of Singapore may be taxed in the
Philippines at a rate not to exceed: (a) 15 percent of the gross
amount of the royalties if the company paying the royalties is
registered with the Board of Investments ("BOI") and engaged in
preferred areas of activities and also royalties in respect of
cinematographic films or tapes for television or broadcasting; or (b)
25 percent of the gross amount of the royalties in all other cases. The
term "royalties" means payments of any kind received as a
literary, artistic or scientific work, any patent, trade mark, design or
model, plan, secret formula or process, and know-how.
A franchise agreement covers both know-how and the
provision of technical assistance, where the franchisor imparts his
knowledge and experience to the franchisee and, in addition,
provides him varied technical assistance, which, in certain cases, is
backed up with financial assistance and the supply of goods. Based
on the OECD Commentary to Article 12, "the appropriate course of
action to take with a mixed contract is, in principle, to break down, on
the basis of the information contained in the contract or by means of a
reasonable apportionment, the whole amount of the stipulated
consideration according to the various parts of what is being provided
under the contract, and then apply to each part of it so determined the
taxation treatment proper thereto. If, however, one part of what is
being provided constitute by far the principal purpose of the contract
and the other parts stipulated therein are only of an ancillary and
largely unimportant character, then the treatment applicable to the
principal part should generally be applied to the whole amount of the
consideration." AIDSTE
In practice, it can be difficult to distinguish between payments

for know-how (royalty) and payments for the provision of services.
The following criteria are relevant for purposes of making distinction:
— Contracts for the supply of know-how concern information
that already exists or concern the supply of that type of
information.
— In the case of contracts for the provision of services, the
supplier undertakes to perform services which may
knowledge, skill or expertise to the other party.
— In most cases involving the supply of know-how, there
would generally be very little more which needs to be
done by the supplier under the contract other than to
performance of services would, in the majority of cases,
involve a very much greater level of expenditure by the
supplier in order to perform his contractual obligations.
(OECD Commentary on Article 12 paragraph 11.3 pages
225-226)
Payments for exclusivity, which means that franchisor agrees
not to supply or grant anyone else that information or right, for
example the use of trademark, should generally fall under the
definition of royalties. Exclusive distribution rights, meaning payments
that are solely made in return for obtaining the exclusive distribution
rights of a product or service in a specific territory do not generally
constitute royalties.
Examples of payments which should therefore not be
considered to be received as consideration for the provision of
know-how but, rather, for the provision of services, include:
• Payments obtained as consideration for after-sales service,
• Payments for services rendered by a seller to the purchaser
under a warranty, AaCTcI
• Payments for pure technical assistance,

• Payments for a list of potential customers, when such a list is
developed specifically for the payer out of generally
available information (a payment for the confidential list
of customers to which the payee has provided a
particular product or service would, however, constitute
a payment for know-how as it would relate to the
commercial experience of the payee in dealing with
these customers),
• Payments for an opinion given by an engineer, an advocate
or an accountant,
• Payments for advice provided electronically, for electronic
communications with technicians or for accessing,
through computer networks, a trouble-shooting database
such as a database that provides users of software with
non-confidential information in response to frequently
asked questions or common problems that arise
frequently.
In the Agreement executed between North Wing and Thai
Express, fees were separately billed and breakdown into the
following items:
1. Royalty fee;
2. Market Launch Fee;
3. Store Opening Fee; and
4. Advertising Expenditure.
The fees represent payments for the use of know-how and the
payments for the provision of services. A close examination of the
Agreement reveals that the fees are paid for the following:
1. Royalty fees are paid in consideration of North Wing's right
to use the trademarks, proprietary marks and the System
of Thai Express; EcTCAD
2. Market Launch fees are paid in consideration of marketing

services provision in the market launching of the
restaurant business including the provision of trainings
and instructions both to the management and kitchen
staff in relation to the management systems and
procedures, back office process (reporting and
accounting) back of the house kitchen operation and the
front of the house service operation;
3. Store Opening fees are paid for the selection of location per
restaurant opening; and
4. Advertising fee are paid in consideration for handling the
advertising requirements (i.e., yellow page advertising
requirements, minimum advertising weight by market).
Based on the foregoing only royalty fees are considered as
royalties under the treaty while Market Launch fee, Store Opening fee
and Advertising Expenditure are payments for services. Thus, they
are considered as business profits and taxed under Article 7 of the
tax treaty.
Paragraph (1) of Article 7 provides:
"Article 7
Business Profits
attributable to that permanent establishment. HSAcaE
xxx xxx xxx"

Based on the foregoing, the profits of an enterprise which is a
resident of Singapore shall be taxable only in Singapore unless such
enterprise carries on business in the Philippines through a permanent
establishment situated therein. If the Singaporean enterprise carries
on business as aforesaid, the profits of such enterprise may be taxed
in the Philippines to the extent that such profits are attributable to that
permanent establishment. Applying this to the instant case, the fees
to be received by Thai Express for the provisions of services in the
Philippines shall be taxable in the Philippines only if it has a
permanent establishment in the Philippines to which said fees may
be attributable.
For purposes of determining the existence of a permanent
establishment, Article 5 of the same tax treaty provides:
"Article 5
Permanent Establishment
on.
not limited to:
b) A branch;
c) An office;
d) A store or other sales outlet; HESIcT
e) A factory;
f) A workshop;
resources;
days; and
aggregating more than 183 days.
xxx xxx xxx"
Based on the foregoing paragraphs, Thai Express is deemed
to have a permanent establishment if it has a fixed place of business
in the Philippines through which its business is wholly or partly carried
on, such as, a store or other sales outlet, a branch, an office, a
factory, a workshop, a warehouse, in relation to a person providing a
storage facilities for others, a mine, quarry, or other place of
extraction of natural resources, or a building site or construction or
assembly project or installation project or supervisory activities
continues for a period more than 183 days, or if it furnishes services,
including consultancy services, through employees or other
personnel, provided activities of that nature continue (for the same or
a connected project) for a period or periods aggregating more than
183 days. caITAC
Accordingly, since Thai Express is not engaged in trade or

business in the Philippines to which a fixed place of business such as
a seat of management, a branch, an office is necessary, and since it
did not provide the services in the Philippines for a period or periods
aggregating more than 183 days (in fact, personnel of North
Wing were sent to Singapore to undergo training on November 17-20,
2011), Thai Express is not deemed to have a permanent
establishment with respect to such services. This being the case, the
service fees to be paid by North Wing to Thai Express (i.e., Market
Launch fee, Store Opening fee and Advertising Expenditure)
are exempt from income tax, pursuant to paragraphs 1, Article 7, in
relation to paragraph 2 of Article 5, of the Philippines-Singapore tax
treaty.
As regards the royalty income, since North Wing is not
registered with the BOI and the royalties in question are not in
respect of the use of or the right to use cinematograph films or tapes
for television or broadcasting, such royalties to be paid by North
Wing to Thai Express under the Agreement, being essentially
royalties for the use of, or the right to use of, the proprietary marks
and trademarks of Thai Express, are subject to income tax at the rate
of 25 percent of the gross amount of the royalties pursuant to Article
12 paragraph 2 (c) of the same treaty.
Finally, the royalties and the service fees, being payments for
the use of intangible properties (patent, trademark, know-how) and
for the provision of services in the Philippines, shall be subject to
value-added tax ("VAT") under Section 108 (A) of the Tax Code,to
wit:
twelve-percent (12%). . ." ICHDca
Relative thereto, North Wing shall withhold VAT at the rate of

12 percent before remitting them to Thai Express. North Wing shall
use BIR Form No. 1600 (Monthly Remittance Return of Value-Added
Tax and Other Percentage Taxes Withheld). The duly filed BIR Form
No. 1600 and its accompanying proof of payment shall serve as
documentary substantiation for North Wing claim of input tax on the
royalties. Otherwise, if North Wing is not a VAT-registered taxpayer,
it may treat such VAT as an asset or expense, whichever is
applicable. VAT withheld shall be remitted within ten days following
the end of the month the withholding was made. 2
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
xxx xxx xxx
agencies including GOCCs, as well as private corporation,
individuals, estates and trust, whether large or non-large taxpayers,
shall withhold twelve percent (12%) VAT, starting February 1,
2006, with respect to the following payments:
Withheld.
Form No. 1600), which VAT is passed on to the resident
withholding agent by the non-resident recipient of the income, may
be claimed as input tax by said VAT-registered withholding agent
upon filing his own VAT Return, subject to the rule on allocation of
input tax among taxable sales, zero-rated sales and exempt sales.
The duly filed BIR Form No. 1600 is the proof or documentary
substantiation for the claimed input tax or input VAT.
evidenced by the duly filed BIR Form No. 1600, shall form part of
the cost of purchased services, which may be treated either as an
'asset' or 'expense', whichever is applicable, of the resident
withholding agent.
n Note from the Publisher: The phrase "and (d) above" no longer appears
||| (ITAD BIR Ruling No. 237-15, [July 27, 2015])
March 21, 2011
Art. 13, Philippines-United

States of America Tax
Treaty; BIR Ruling No.
ITAD-127-06; BIR Ruling
No. DA-ITAD-032-08; BIR
Ruling No.
DA-ITAD-105-08; BIR
Ruling No.
DA-ITAD-024-09; BIR
Ruling No.
DA-ITAD-060-07
Sycip Gorres Velayo & Co.

6760 Ayala Avenue
1226 Makati City
Attention: R.C. Vinzon

Tax Services
Gentlemen :
This refers to your letter dated December 2, 2008 requesting

confirmation of your opinion that the royalties paid by IMS Health
Philippines, Inc. (IMS-Philippines) to IMS Software Services, Ltd.
(IMS-US) are subject to preferential tax rate of 10 percent of the
gross amount of royalty payments in accordance with
the "most-favored nation" clause of the Philippines-United States of
America (Philippines-US) tax treaty in relation to the provisions of
the Philippines-China tax treaty.
It is represented that IMS-US is a corporation organized and
existing under the laws of the United States of America as evidenced
by its Certificate of Incorporation; that its principal office is at
Corporation Trust Center, 1209 Orange Street, Country of New
Castle, Wilmington, DE 19801, U.S.A.; that IMS-US is not registered
either as a corporation or as a partnership in the Philippines as
confirmed by the Certification of Non-Registration of
Corporation/Partnership dated January 16, 2009 issued by the
Securities and Exchange Commission; that, on the other
hand, IMS-Philippines is a domestic company with principal office at
15th Floor BPI Buendia Center Building, Sen. Gil Puyat Avenue,
Makati City.
It is further represented that on January 6, 2006, IMS-US
and IMS-Philippines entered into an Intangible Property License
Agreement (Agreement) whereby IMS-US grants IMS-Philippines the
exclusive right to use, develop, and enjoy the Intangible
Property, 1 Improvements, 2 and Know-How 3 in the Territory, 4 subject
to the terms and conditions of the Agreement;
that IMS-Philippines shall not assign, sublicense, make available or
otherwise transfer or disclose any right to use, develop, or otherwise
enjoy the Intangible Property without the express written consent of
IMS-US; that IMS-Philippines assigns and transfers to IMS-US all
legal right, title and interest of the IMS-Philippines to all of the
Know-How and Improvements developed or acquired
by IMS-Philippines related to the Intangible Property during the term
of the Agreement; that the parties agreed that the royalties due to
IMS-US shall be due and payable on a calendar quarter basis; that
the Agreement shall commence on the effective date, and, unless
terminated sooner as hereinafter provided, shall continue from the
effective date and the Agreement shall automatically renew each
year, unless either party gives notice of its intention not to renew at
least sixty (60) days prior to the renewal; and that the issue or
transaction subject of above application is not under investigation,
on-going audit, administrative protest, claim for refund or issuance of
a tax credit certificate, collection proceedings, or a judicial appeal.
TIaDHE

the National Internal Revenue Code (Tax Code) of 1997, as
amended, applies in general to royalty payments received by
nonresident foreign corporations. It provides:
Corporations. —
xxx xxx xxx
in this Code, a foreign corporation not engaged
in trade or business in the Philippines shall pay
a tax equal to thirty-five percent (35%) of the
gross income received during each taxable year
from all sources within the Philippines, such as
5(c): Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent
(30%).
xxx xxx xxx"
However, Section 32 (B) (5) of the Tax Code of 1997, as
amended, provides:
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
In relation thereto, the provisions of the Philippines-US tax
treaty may apply to your instant request for relief particularly its Article
13, which provides:
"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. SETaHC
2. However, the tax imposed by that other Contracting

State shall not exceed —
a) In the case of the United States, 15
percent of the gross amount of the royalties,
and
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
State.
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"
Paragraph 2 (b) (iii) above provides that royalties arising in the
Philippines and derived by a resident of the United States shall be
subject to the lowest rate of Philippine income tax that may be
imposed on royalties of the same kind paid under similar
circumstances to a resident of a third State (commonly known as
the most-favored-nation tax treatment on royalties). The Supreme
Court, in Commissioner of Internal Revenue vs. S.C. Johnson and
Son, Inc. and Court of Appeals (G.R. No. 127105 dated June 25,
1999), has cited two conditions for royalties arising in the Philippines
and derived by a resident of another country (in this case, the United
States) to be qualified for a most-favored-nation tax treatment. First,
the royalties in question derived by a resident of the other country
(the United States) must be of the same kind as those derived by a
resident of the third country which is subject to
the most-favored-nation tax treatment under the existing tax treaty
between the Philippines and the third country. Second, the
mechanism employed by the other country (the United States) in
mitigating the effects of double taxation of foreign-sourced income
derived by its residents must be the same with that employed by the
third country, which can be determined by taking into account and
comparing the respective articles on Elimination of Double Taxation
of the other country (the United States) and the third country under
their respective tax treaties with the Philippines. CcHDSA
In looking for a third country which grants

a most-favored-nation tax treatment on royalties, you cited the
People's Republic of China, particularly, the Agreement between the
Government of the Republic of the Philippines and the Government
of the People's Republic of China for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income (Philippines-China tax treaty) which entered into force on
March 23, 2001, and whose provisions on taxes apply on income
derived or which accrued beginning January 1, 2002. Article 12 of this
tax treaty 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.
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
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
experience.
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.
xxx xxx xxx"
According to paragraph 2, royalties arising in the Philippines
and derived by a resident of the People's Republic of China are
subject to income tax at the rate of (a) 15 percent of the gross amount
of the royalties for 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 radio broadcasting, or
(b) 10 percent of the gross amount of the 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. TCHcAE
Applying the Philippines-China tax treaty, the royalty fees to be
paid by IMS-Philippines to IMS-US for the right to use the Intangible
Property, Improvements, and Know-How, may be subject to 10
percent based on the gross amount thereof, provided the two
conditions for the most-favored-nation tax treatment on royalties (as
described above) are both satisfied.
On whether the first condition is satisfied, we note that under
paragraph 3, Article 13 of the Philippines-US tax treaty quoted below,
payments received as a consideration for the use or the right to use
of patents, information concerning industrial, commercial or scientific
experience (know-how), and copyright of literary, artistic or scientific
work (to which the royalty fee for the use or the right to use of the
Licensed Patents, Licensed Trademark and Technical Information,
are assimilated, (respectively) are all considered royalties, thus:
"3. The term 'royalties' as used in this article means
thereof."
In the same manner, although lacking a separate paragraph for
the definition of royalties in its article, paragraph 2 (a), Article 12 of
the Philippines-China tax treaty, as quoted above, provides that
royalties arising from the use or the right to use of patents,
information concerning industrial, commercial or scientific experience
(know-how), and copyright of literary, artistic or scientific work,
among others, are subject to income tax rate of 10 percent of the
gross amount thereof. This being the case, the first condition for the
most-favored-nation tax treatment of royalties is satisfied, which
requires the royalties derived by a resident of the US must be of the
same kind as those derived by a resident of China.
As to the second condition, under paragraph 1, Article 23 of the
Philippines-US tax treaty below, the mechanism employed in
mitigating the effects of double taxation of income from foreign
source is the ordinary credit method. It provides:
"Article 23
following manner:
principle hereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United
States tax the appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United States corporation
owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes
corporation paying such dividends with respect to the profits
out of which such dividends are paid. Such appropriate
amount shall be based upon the amount of tax paid or
accrued to the Philippines, but the credit shall not exceed the
limitations (for the purpose of limiting the credit to the United
States tax on income from sources within the Philippines or
on income from sources outside the United States) provided
by United States law for the taxable year. For the purpose of
applying the United States credit in relation to taxes paid or
accrued to the Philippines, the rules set forth in Article 4
(Source of Income) shall be applied to determine the source
of income. For purposes of applying the United States credit
in relation to taxes paid or accrued to the Philippines, the
taxes referred to in paragraphs 1(b) and 2 of Article 1 (Taxes
Covered) shall be considered to be income taxes. HCTAEc
xxx xxx xxx"

Under the ordinary credit method, the US (as country of
residence) would limit a taxpayer's allowable tax credit to that portion
of the taxpayer's tax liability in the US that is attributable to the
income that is taxed in the Philippines (the country of source or
country of situs). As a result of this limitation, if the Philippines has an
effective tax rate that exceeds the effective tax rate of the US on a
particular income, the US would not grant the taxpayer a full credit for
the income tax imposed by the Philippines on such income.
In the same manner, under paragraph 1, Article 23 of
the Philippines-China tax treaty below, it can be seen that that
ordinary credit method is also employed by China as a mechanism
for mitigating the effects of double taxation of income derived by its
residents from foreign sources, thus:
"Article 23
METHODS FOR THE ELIMINATION OF DOUBLE
TAXATION
1. In China, double taxation shall be eliminated as
follows:
Where a resident of China derives income from the
Philippines the amount of tax on that income payable in the
Philippines in accordance with the provisions of this
Agreement, may be credited against the Chinese tax
imposed on that resident. The amount of the credit, however,
shall not exceed the amount of the Chinese tax on that
income computed in accordance with the taxation laws and
regulations of China.
2. In the Philippines, double taxation shall be
eliminated as follows:
Subject to the laws of the Philippines and the
limitations thereof regarding the allowance of a credit against
Philippine tax of tax payable in any country other than the
Philippines. Chinese tax payable in respect of income derived
from China shall be allowed as credit against the Philippine
tax payable in respect of that income.
xxx xxx xxx"
This being the case, the second condition for the
most-favored-nation tax treatment on royalties, which requires that
the mechanism employed by the US in mitigating the effects of
double taxation of income derived by its residents from foreign
sources must be the same with that employed by China, is also
satisfied.
In fine, by reason that the conditions for the
most-favored-nation tax treatment on royalties laid down by the
Supreme Court in the S.C. Johnson case are both
satisfied, royalty fees to be paid by IMS-Philippines to IMS-US for the
use or the right to use the Intangible Property, Improvements, and
Know-How, is subject to 10 percent income tax based on the gross
amount thereof. (BIR Ruling No. ITAD 127-06 dated October 23,
2006; BIR Ruling No. DA-ITAD-032-08 dated May 9, 2008; BIR
Ruling No. DA-ITAD 105-08 dated December 12, 2008; BIR Ruling
No. DA-ITAD 024-09 dated February 27, 2009; and BIR Ruling No.
DA-ITAD 060-07 dated May 11, 2007) aTIEcA
Finally, as regards value-added tax (VAT), the royalties for the

use or the right to use the Intangible Property, Improvements, and
Know-How to be paid by IMS-Philippines to IMS-US are subject to
VAT under Section 108 (A) of the National Internal Revenue Code of
1997 (Tax Code), as amended, to wit:
properties.
. . . The phrase 'sale or exchange of services' shall
likewise include:
(1) The lease or the use of or the right or
privilege to use any copyright, patent, design or
model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or
right;
xxx xxx xxx" 5
With regard to the procedures for withholding and paying the
VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section
3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue
Regulations No. 14-2002, provide that IMS-Philippines shall be
responsible for the withholding of the VAT on the royalties before
remitting them to IMS-US. In remitting to the Bureau of Internal
Revenue the VAT withheld on the royalties, IMS-Philippines shall use
BIR Form No. 1600 (Monthly Remittance Return of VAT and Other
Percentage Taxes Withheld). If a VAT-registered
taxpayer, IMS-Philippines may use as documentary substantiation for
its claim of input VAT the duly filed BIR Form No. 1600 and the proof
of payment accompanying it. In addition, IMS-Philippines is required
to issue in quadruplicate the Certificate of Final Tax Withheld at
Source (BIR Form No. 2306), the first three copies for IMS-US and
the fourth copy for IMS-Philippines as its file copy.
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Intangible Property shall mean new and improved software infrastructure
systems, enhanced and expanded global offerings, expanded data
panels, consulting methodologies, processes, state-of-the-art global
business practices and marketing capabilities, including associated
trademarks, service marks and trade names.
2.Improvements shall mean any findings, discoveries, inventions, additions,
modifications, formulations, or changes made by either Licensor or
Licensee during the term of the Agreement that relate to the
Intangible Property.
3.Know-How shall mean any and all technical information presently
available or generated during the term of the Agreement that relates
to the Intangible Property, Improvements or Offerings.
4.Territory shall mean the area within the geographic area of [ ].
5.Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107,
108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151,
236, 237 and 288 of the National Internal Revenue Code of 1997, as
Amended, and for Other Purposes), which was signed into law on
May 24, 2005 and became effective on November 1, 2005,
amended Section 108 (A) to read as:
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange of services,
including the use or lease of properties selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: Provided, that the President,
upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (2
4/5%); or
(ii) National government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 1/2%).
. . . The phrase 'sale or exchange of services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright,
patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
xxx xxx xxx"
The VAT rate was increased to 12% on February 1, 2006, in accordance
September 26, 2011
Article
12, Philippines-Korea tax
treaty; BIR Ruling No.
131-97; BIR Ruling No.
DA-ITAD 75-02
Follosco Morallos & Herce

Attorneys-At-Law
Suite 2500, 25th Floor, 88 Corporate Center
141 Valero Street corner Sedeño Street
Salcedo Village, Makati City
Attention: Atty. Rachel P. Follosco

Atty. Lovely E. Lim
Gentlemen :
This refers to your letter dated October 27, 2009 requesting

confirmation that royalties paid by MYGAME.PH, INC.
("MYGAME.PH") 1 to DRAGONFLY GF COMPANY LTD.
("DRAGONFLY") are subject to income tax at a preferential rate of 15
percent pursuant to Article 12 of the Convention between the
Republic of the Philippines and the Republic of Korea for the
with Respect to Taxes on Income ("Philippines-Korea tax treaty"). HCISED
It is represented that DRAGONFLY is a corporation organized

and existing under the laws of Korea as evidenced by its Articles of
Incorporation and the Certificate of Business Registration issued by
the Gangnam District Tax Office in Korea on May 26, 2006; that
DRAGONFLY is situated at Dragonfly Building, 30-10 Nonhyundong,
Gangnam-gu, Seoul, Korea; that DRAGONFLY is not registered as a
corporation or as partnership in the Philippines based on the
Certification of Non-Registration issued by the Securities and
Exchange Commission on March 23, 2009; that DRAGONFLY is
engaged in the manufacture and sale of computer software;
development, and export and import of game software; distribution
and sale of game software; network construction; homepage
production; construction and processing of databases; development
and sale of CD-ROM titles, data processing; Internet-related
business; production and distribution of digital contents;
entertainment-related business; distribution of contents copyright;
mail-order business; investment in other companies engaged in the
foregoing activities; and any activities incidental thereto; that, on the
other hand, MYGAME.PH is a domestic corporation located at 1601
Taipan Place, F. Ortigas Jr. Road, Ortigas Center, Pasig City,
Philippines; and that MYGAME.PH is engaged in recreation, games
and amusement center, online gaming, computer games, video
games, play stations, and other related recreational activities.
It is further represented that on October 5, 2007, DRAGONFLY
and MYGAME.PH (under its original name, MICROGAMING
TECHNOLOGY CORPORATION) entered into an Exclusive Special
Force License and Distribution Agreement where DRAGONFLY
grants MYGAME.PH an exclusive, royalty-bearing and
non-transferable license for service, use, promotion, distribution and
marketing of the Game to End Users and to use the Technical
Information for such purpose within the Philippines;
that Game means the first person shooting game known as "Special
Force", including, but not limited to, any patched version of the Game
distributed by DRAGONFLY for, but not limited to, error correcting,
updating or debugging purpose, under and only the same title; that
any series or sequel to the Game other than the Philippines Version
contemplated by the Agreement, which may be developed or
distributed by DRAGONFLY after the execution of the Agreement,
shall be clearly excluded from the scope of the Agreement; that End
Users means the users of the Game through network game service
system established and operated by MYGAME.PH with individually
assigned ID numbers for each End User; that Technical
Information means the software, know-how, data, test result, layouts,
artwork, processes, scripts, concepts and other technical information
on or in relation to the Game and the installation, operation,
maintenance, service and use thereof; that DRAGONFLY also grants
MYGAME.PH the right and license to use the Trademarks in
connection with the service, use, promotion, distribution and
marketing of the Game in the Philippines; that Trademarks means
the trademarks, trade names, identifying marks or characteristics or
other equivalent belonging to the Licensor or to the Licensee that is
used on or in connection with the Game or associated manuals,
promotional or sales brochures or other materials, whether registered
or unregistered; that the service, use, promotion, distribution and
marketing of the Game shall be made only in English language using
the Philippines Version in the Philippines; that MYGAME.PH shall
exert its best efforts to advertise, promote and market the Game in
the Philippines; that in consideration, MYGAME.PH will pay royalties
to DRAGONFLY under the following conditions:
(i) The royalties are equivalent to 22 percent of the Gross
Revenue beginning in the month of the commercial
operation of the Game. Gross Revenue means gross
sales generated by any and all methods incurred by the
Game including but not limited to on-line and off-line
sales, with only allowable deduction for value added
taxes, but above figures does not include reduction for
Channel Cost. Channel Cost means the amounts paid in
connection with the distribution channels used for the
Game by MYGAME.PH, specifically including, but not
limited to, the Wholesalers. Wholesalers means those
persons or entities, including, without limitation, PC
game room operators, computer shops and convenience
stores, who sell ID numbers or prepaid cards for the
Game to End Users.
(ii) The royalties will be paid every month. MYGAME.PH shall
provide DRAGONFLY with a report each month, which
shall be in a form and substance acceptable to
DRAGONFLY and shall contain detailed information of
the calculation of the Gross Revenue for the month
concerned.
(iii) MYGAME.PH shall deduct any amount of refund from
royalties to be paid in the following month for royalties
paid in excess of the current month.
That the royalties shall be made in United States Dollars by wire
transfer to the account designated by DRAGONFLY or in accordance
with other method as may be mutually agreed between the parties;
and that the Agreement shall become effective on October 5, 2007,
and shall remain in effect for three years from the month of the
commercial operations of the Game, unless terminated. aETDIc

the Corporate Secretary of MYGAME.PH on November 4, 2009.
A. On Income tax
In reply, please be informed that the royalties paid to
DRAGONFLY, a foreign corporation not engaged in trade or business
in the Philippines, are subject to income tax at the rate of 35 percent
before January 1, 2009 and 30 percent beginning January 1, 2009.
1997 ("Tax Code"), as amended, provides:
Corporations. —
xxx xxx xxx
in this Code, a foreign corporation not engaged
in trade or business in the Philippines shall pay
a tax equal to thirty-five percent (35%) of the
gross income received during each taxable year
from all sources within the Philippines, such as
(30%).
xxx xxx xxx"
However, Section 32 (B) (5) of the Tax Code provides that the
royalties may be exempt or subject to a reduced rate of income tax to
the extent required by any treaty obligation on the Philippines, viz.:
xxx xxx xxx
xxx xxx xxx
any kind, to the extent required by any treaty
obligation binding upon the Government of the
Philippines.
xxx xxx xxx"
In relation thereto, you invoke the Philippines-Korea tax treaty.
Paragraphs 1, 2, 3 and 4, Article 12 thereof provide:
"Article 12
ROYALTIES
other State if such resident is the beneficial owner of the
royalties.
2. However, such royalties may 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 15 per cent
of the gross amount of the royalties. TCIDSa
3. Notwithstanding the provisions of paragraph 2

hereof, the amount of tax imposed by the Philippines on the
royalties paid by a company, being a resident of the
Philippines, registered with the Board of Investments and
engaged in preferred pioneer areas of investment under the
investment incentives laws of the Philippines to a resident of
Korea, who is the beneficial owner of the royalties, shall not
exceed 10 per cent of the gross amount of the royalties.
4. The term 'royalties' as used in this Article means
of, or right to use, any copyright of literary, artistic or scientific
work, 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, and includes payments of any kind in respect of
motion picture films and works on films or videotapes for use
in connection with television or tapes for the use of radio
broadcasting.
xxx xxx xxx"
Based on the above-cited provisions, royalties arising in the
Philippines and derived by a resident of Korea may be taxed in the
Philippines at a rate not exceeding (a) 10 percent of the gross
amount of the royalties if paid by a corporation registered with the
Board of Investments (BOI) and engaged in preferred areas of
activities; and (b) 15 percent of the gross amount of the royalties and
in all other cases.
This being the case, considering that MYGAME.PH is not a
BOI registered entity, this Office is of the opinion and so holds that
royalties paid by MYGAME to DRAGONFLY, beginning October 27,
2009 until October 5, 2010, unless terminated earlier, pursuant to the
Agreement for the use in the Philippines of the Technical Information
and the Trademarks, shall be subject to income tax at the rate of 15
percent of the gross amount thereof. (BIR Ruling No. 131-97 dated
December 11, 1997; BIR Ruling No. DA-ITAD 75-02 dated May 2,
2002)
B. On Value-added tax
Finally, the royalties payable to DRAGONFLY are subject to
value-added tax ("VAT") under Section 108 (A) of the Tax Code, as
amended, thus:
exchange of services, including the use or lease of properties
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller
or transferor: Provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve
satisfied:
EHaCID
(i) Value-added tax collection as a percentage

of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a percentage
of GDP of the previous year exceeds one and
one-half percent (1 1/2%).
. . . The phrase 'sale or exchange of services
shall likewise include:
model, plan, secret formula or process, goodwill,
right;
xxx xxx xxx" 2
With regard to the procedures for the withholding and payment
of VAT, MYGAME.PH shall withhold VAT on the royalties at the rate
of 12 percent before remitting them to DRAGONFLY. In remitting to
the Bureau of Internal Revenue the VAT withheld, MYGAME.PH shall
use BIR Form No. 1600 (Monthly Remittance Return of VAT and
Other Percentage Taxes Withheld). In addition, MYGAME.PH is
required to issue in quadruplicate the Certificate of Final Tax
Withheld at Source (BIR Form No. 2306), the first three copies for
DRAGONFLY and the fourth copy for MYGAME.PH as its file copy. 3
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Originally, Microgaming Technology Corporation, then MyGame1, Inc.
3.Pursuant to Revenue Regulations No. 16-2005 (Consolidated
Value-Added Tax Regulations of 2005), as amended.
||| (ITAD BIR Ruling No. 230-11, [September 26, 2011])
July 21, 2014
Article 12,
Philippines-Singapore tax
treaty; Section 28 (B) (1) in
relation to Section 32 (B)
(5) of the Tax Code of
1997, as amended
OBS Restaurant Philippines Corporation

Unit 109 Heartland Building, 1144 Chino Roces Avenue
Makati City
Attention: Remedios B. Abcede

Finance and Accounting Manager
Gentlemen :
This refers to your tax treaty relief application (TTRA) filed on

March 26, 2012 requesting confirmation that the subfranchise fees
and royalty payments by OBS Restaurant Philippines Corporation
("OBS") to Universal Success Restaurants Pte. Ltd. ("Universal
SG") are subject to preferential tax rate pursuant to the Convention
between the Republic of the Philippines and the Republic of
Singapore for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income
("Philippines-Singapore tax treaty").
It is represented that Universal SG is a resident of Singapore
with address at 8 Temasek Boulevard, #40-01A, Singapore, based
on the Certificate of Residence dated June 12, 2012, issued by the
Inland Revenue Authority of Singapore; that Universal SG is not
registered as a corporation or as a partnership in the Philippines
the Securities and Exchange Commission dated May 16, 2012; and
that on the other hand, OBS is a domestic corporation with address at
Unit 109 Heartland Building, 1144 Chino Roces Avenue, Makati City.
It is further represented that on April 12, 2010, Universal
SG and OBS entered into a Subfranchise Agreement
("Agreement") whereby Universal SG, having been granted
by Outback Steakhouse International, L.P. the license to operate a
distinctive system for the establishment and operation of full-service
restaurants featuring a specialized menu and full bar service, grants
OBS the subfranchise of the same and operate the Outback
Steakhouse Restaurant located in Alabang, Muntinlupa City and the
use of the proprietary marks and system; that for and in consideration
of the said subfranchise, OBS shall pay Universal SG a one-time
franchise fee in the amount of US$4,175.00 and a monthly royalty fee
equal to 8% of the gross sales of OBS for the respective preceding
month which shall be due on or before the 10th day of every month;
and that first payment of the fees under the Agreement was made on
February 16, 2011 based on the Wiring Instructions prepared by the
Treasury Officer and Accounting Manager of OBS on even date. SDHETI

proceedings, or a judicial appeal based on the Affidavit issued by
OBS on March 23, 2012.
provides:
Corporations. — . . .
5(c) and (d) above: n Provided, That effective
Philippines. Section 32 (B) (5) of the Code provides:
xxx xxx xxx
Thus, you invoke the Philippines-Singapore tax treaty.
With respect to royalties, Paragraphs 1, 2, and 3 Article 12
thereof provide: DIAcTE
"Article 12
Royalties
that other State.
the law of that State, but, if the recipient is the beneficial
exceed:
a) in the case of the Philippines, 15 per cent of the gross
amount of the royalties, where the royalties are
paid by an enterprise registered with the
Philippine Board of Investments and engaged in
preferred areas of activities and also royalties in
respect of cinematographic films or tapes for
television or broadcasting;
b) in the case of Singapore, where the royalties are
approved under the Economic Expansion
Incentives (Relief from Income Tax) Act of
Singapore, the royalties shall be exempt;
c) in all other cases, 25 per cent of the gross amount of
the royalties.
scientific work, including cinematographic films or tapes
for television or broadcasting, any patent, trade mark,
industrial, commercial or scientific experience."
Under paragraph 2 of Article 12 of the Philippines-Singapore
tax treaty, royalties arising in the Philippines and paid to a resident of
Singapore may be taxed in the Philippines at a rate not to exceed 15
per cent of the gross amount of the royalties, where the royalties are
paid by an enterprise registered with the Philippine Board of
Investments and engaged in preferred areas of activities and also
royalties in respect of cinematographic films or tapes for television or
broadcasting, but in all other cases, the rate shall be 25 per cent of
the gross amount of the royalties. THEDcS
Accordingly, since OBS is not registered with the Philippine

Board of Investments and the fees do not arise in respect of
cinematographic films or tapes for television or broadcasting,
such fees made by OBS to Universal SG under the Agreement shall
be subject to 25 percent of the gross amount of the royalties based
on paragraph 2 (c) of Article 12 of the Philippines-Singapore tax
treaty.
application of the formulas granted to the licensee and that he
does not guarantee the result thereof.
11.2. This type of contract thus differs from contracts
for the provision of services, in which one of the parties
execute work himself for the other party. Payments made
under the latter contracts generally fall under Article 7.
payments for the provision of services, sometimes gives rise
to practical difficulties. The following criteria are relevant for
the purpose of making that distinction: SacTCA

information of that kind described in paragraph 11 that
information.
performance of services would, in the majority of
cases, involve a very much greater level of expenditure
by the supplier in order to perform his contractual
researching, designing, testing, drawing and other
associated activities or payments to sub-contractors for
the performance of similar services.
11.4. Examples of payments which should therefore
not be considered to be received as consideration for the
provision of know-how but, rather, for the provision of
services, include:
— payments obtained as consideration for after-sales
service,
— payments for services rendered by a seller to the
purchaser under a warranty,
— payments for a list of potential customers, when such
a list is developed specifically for the payer out of
generally available information (a payment for the
provided a particular product or service would, however,
these customers), IcHSCT
— payments for an opinion given by an engineer, an
advocate or an accountant, and
— payments for advice provided electronically, for
electronic communications with technicians or for
common problems that arise frequently." (Pages
225-226)
generally be very little more which needs to be done by Universal
SG under the Agreement other than to supply existing information or
reproduce existing material for use of OBS.
Furthermore, the royalty payments made by OBS are subject
to the 12% value-added tax (VAT) pursuant to Section 108 of the
National Internal Revenue Code of 1997, as amended. Accordingly,
OBS, being the payor in control of the payment shall be responsible
for the withholding of VAT on the said royalty payments on behalf
of Universal SG by filing a separate VAT return for and on behalf
of Universal SG using BIR Form No. 1600 (Monthly Remittance
Return of Value-Added Tax and Other Percentage Taxes Withheld).
The duly filed BIR Form 1600 and proof of payment thereof shall
serve as sufficient basis for the claim of input tax to be applied
against the output tax that may be due from OBS, if it is a VAT
registered taxpayer. In case OBS is a non-VAT registered taxpayer,
the passed-on VAT withheld shall form part of the cost of the service
purchased or treated as an "expense" or an "asset", whichever is
applicable. In addition, OBS is required to issue the Certificate of
Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate,
the first three copies thereof to be given to Universal SG upon its
request, and the fourth copy to be retained by OBS as its
copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as
amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended
by RR 04-07)] aTDcAH

Very truly yours,

(SGD.) KIM S.
JACINTO-HENARES
Footnotes
n Note from the Publisher: The phrase "and (d) above" no longer appears in
RA 9337, the law amending this provision.
June 5, 2015
Article
treaty, as amended;
Section 28 (B) (1) and
Section 32 (B) (5), Tax
Code of 1997, as
amended
Philippine Parkerizing, Inc.

1148 R. Bernal Street, Rosario
Pasig City
Attention: Mr. Charlie Sy
President
Gentlemen :

December 16, 2012, requesting confirmation that royalties received
by NIHON PARKERIZING CO. LTD. ("Nihon") from PHILIPPINE
PARKERIZING, INC. ("Philippine Parkerizing") are subject to income
tax at a preferential tax rate of 10 percent pursuant to Article 12 of
the Convention between the Republic of the Philippines and Japan
for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income ("Philippines-Japan tax
treaty"), as amended by Protocol 1 effective January 1, 2009.
Facts
It is represented that Nihon is a corporation organized and
existing under the laws of Japan and is a resident of Japan based on
the Certification of Residence issued by the Nihonbashi Tax Office in
Japan on October 31, 2012; that Nihon is situated at Parker Building,
15-1 Nihonbashi 1-Chome, Chuo-ko, Tokyo, Japan; that Nihon is not
registered as corporation or partnership in the Philippines based on
the Certification of Non-Registration of Company issued by the
Securities and Exchange Commission on December 13, 2012; and
that Philippine Parkerizing is a domestic corporation situated at 1148
R. Bernal Street, Rosario, Pasig City, Philippines.
It is further represented that on July 1,
2012, Nihon and Philippine Parkerizing executed a Blanket Technical
License Agreement for Metal Surface Treatment Technologies
("Agreement") where Nihon grants Philippine Parkerizing the
following: acEHCD
1. Non-exclusive license to use the know-how for

manufacturing and selling Nihon Products in and outside
the Philippines;
2. Advisory assistance on the organization for manufacturing of
Product, manufacturing and packaging methods for the
Product, marketing know-how, distribution, logistics and
sales of Product;
3. Provision of technical support necessary for the
manufacturing and/or sales of Product by Philippine
Parkerizing or the application of processing know-how
for the purpose of performing the rust prevention and
heat treatment process in the Philippines which is mainly
provided by Nihon's personnel stationed at Philippine
Parkerizing;
4. Provision of trainings by Nihon's personnel stationed
in Philippine Parkerizing.
Product means any and all products used in the technology fields.
Technology fields are those utilized for metal surface treatment and
relevant technologies, including patents, patent applications and
know-how, and shall include technologies applied to processing
operations such as rust prevention and heat treatment. Philippine
Parkerizing has no right to sublicense, transfer, subcontract, assign
or otherwise made available for the use by a third party. In
consideration for the technology, technical information, processing
know-how, technical support and training provided
by Nihon to Philippine Parkerizing, the latter shall pay the royalty fee
in the amount equal to 4 percent of the sum of the following:
1) Net Sales Price of all product manufactured and sold by
utilizing the Technology, including those exported to any
of other countries.
2) Net Contract Processing Costs obtained by using
Processing Know-How.
The Net Selling Price shall mean the amount as the basis for
calculating the royalty to be paid which is equal to the total amount of
Selling Price less the followings: provided that such deduction
specified shall not exceed 10 percent of the Selling Price:
1) CIF purchase price for intermediate products procured
from Nihon and import duty imposed upon importation;
and
2) Costs and expenses for packing materials, transportation,
insurance, sales credit and returns.
The Net Contract Processing Costs shall mean the amount as the
basis for calculating the royalty to be paid from Philippine
Parkerizing to Nihon, which is equal to the total amount of selling
price obtained through contract processing (e.g., rust prevention and
heat treatment) less the followings; provided that such deduction
specified below shall not exceed 10 percent of the contract
processing price:
1. Costs and expenses for packing materials, transportation,
insurance, sales credits and returns.
Royalty payment has been made by Philippine
Parkerizing to Nihon covering the period from July 1, 2012 to
December 31, 2012 on July 17, 2013 as evidenced by the machine
validated Application for Miscellaneous Transactions of Metropolitan
Bank & Trust Company. SDHTEC
It is further represented that the Agreement shall be effective

for a term of five (5) years commencing on July 1, 2012, unless
terminated earlier, and may be extended thereafter; and that the
Agreement complied with the provisions of the Intellectual Property
Code of the Philippines on Voluntarily Licensing under Certificate of
Compliance No. 5-2012-00045 issued by the Intellectual Property
Office on July 1, 2012, valid for five years from July 1, 2012 to June
30, 2017.
the President of Philippine Parkerizing on December 14, 2012.
Ruling
the National Internal Revenue Code of 1997 ("Tax Code"), as
amended, provides that gains derived by Nihon, being a foreign
corporation not engaged in trade or business in the Philippines, are
subject to income tax in the Philippines at the rate of 30 percent, thus:
Corporations. —
xxx xxx xxx
(30%).
xxx xxx xxx"
However, Section 32 (B) (5) of the Code provides that the
gains may be exempt from income tax or subject to a reduced rate to
the extent required by any treaty obligation on the Philippines, viz.:
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
For this purpose, you invoke the provisions of
the Philippines-Japan tax treaty.
The Agreement is in nature a mixed contract. The relevant
provisions of the Philippines-Japan tax treaty are found in Article 12
(Royalties) and Article 7 (Business Profits), in relation to Article 5
(Permanent Establishment).
Paragraphs 1, and 2, Article 12 thereof provide:
"Article 12
shall not exceed:
(a) 15 per cent of the gross amount of the royalties if the
(b) 10 per cent of the gross amount of the royalties in all
other cases.
3. Notwithstanding the provisions of paragraph 2, the amount
of tax imposed by the Philippines on the royalties paid
by a company, being a resident of the Philippines,
registered with the Board of Investments and engaged in
preferred pioneer areas of investment under the
investment incentives laws of the Philippines to a
resident of Japan, who is the beneficial owner of the
royalties, shall not exceed 10 per cent of the gross
amount of the royalties. HESIcT

commercial or scientific equipment or for information
experience.
xxx xxx xxx."
Based on the foregoing provisions, royalties arising in the
Philippines and paid to a resident of Japan may be taxed in the
Philippines at a rate not to exceed (a) 10 percent of the gross amount
of the royalties if the company paying the royalties is registered with
the Board of Investment and engaged in preferred areas of
investments under the investment incentive laws of the Philippines; (b)
15 percent of the gross amount of the royalties if they are paid in
respect of the use of or the right to use cinematograph films and films
or tapes for radio or television broadcasting; and (c) 10 percent of the
gross amount of the royalties, in all other cases.
The Agreement covers both know-how and the provision of
technical assistance, where the Licensor imparts his knowledge and
experience to the Licensee and, in addition, provides him varied
technical assistance, which, in certain cases, is backed up with
financial assistance and the supply of goods. Based on the OECD
Commentary to Article 12, "the appropriate course of action to take
with a mixed contract is, in principle, to break down, on the basis of
the information contained in the contract or by means of a reasonable
apportionment, the whole amount of the stipulated consideration
according to the various parts of what is being provided under the
contract, and then apply to each part of it so determined the taxation
treatment proper thereto. If, however, one part of what is being
provided constitute by far the principal purpose of the contract and
the other parts stipulated therein are only of an ancillary and largely
unimportant character, then the treatment applicable to the principal
part should generally be applied to the whole amount of the
consideration."
In practice, it can be difficult to distinguish between payments
for know-how (royalty) and payments for the provision of services.
The following criteria are relevant for purposes of making distinction:
- Contracts for the supply of know-how concern information
that already exists or concern the supply of that type of
information.
- In the case of contracts for the provision of services, the
supplier undertakes to perform services which may
- In most cases involving the supply of know-how, there would
generally be very little more which needs to be done by
the supplier under the contract other than to supply
existing information or reproduce existing material. On
the other hand, a contract for the performance of
services would, in the majority of cases, involve a very
much greater level of expenditure by the supplier in
order to perform his contractual obligations. (OECD
Commentary on Article 12 paragraph 11.3 pages
225-226) caITAC
Payments for exclusivity, which means that Licensor agrees

not to supply or grant anyone else that information or right, for
example the use of trademark, should generally fall under the
definition of royalties. Exclusive distribution rights, meaning payments
that are solely made in return for obtaining the exclusive distribution
rights of a product or service in a specific territory do not generally
constitute royalties.
Examples of payments which should therefore not be
considered to be received as consideration for the provision of
know-how but, rather, for the provision of services, include:
• Payments obtained as consideration for after-sales service,
• Payments for services rendered by a seller to the purchaser
under a warranty,
• Payments for pure technical assistance,
• Payments for a list of potential customers, when such a list is
developed specifically for the payor out of generally
available information (a payment for the confidential list
of customers to which the payee has provided a
particular product or service would, however, constitute
a payment for know-how as it would relate to the
commercial experience of the payee in dealing with
these customers),
• Payments for an opinion given by an engineer, an advocate
or an accountant,
• Payments for advice provided electronically, for electronic
communications with technicians or for accessing,
through computer networks, a trouble-shooting database
such as a database that provides users of software with
non-confidential information in response to frequently
asked questions or common problems that arise
frequently.
In the Agreement executed between Nihon and Philippine
Parkerizing, fees should be separately billed and breakdown into the
following items:
1. Royalty fee; and
2. Technical Service Fee.
The fees represent payments for the use of know-how and the
payments for the provision of services. A close examination of the
Agreement reveals that the fees are paid for the Nihon's right to use
the trademarks, patents and know-how in manufacturing and
packaging the products, technical assistance, advisory and trainings
done by the personnel of Nihon stationed in Philippine
Parkerizing.ICHDca
Based on the foregoing only royalty fees are considered as

royalties under the treaty while fees for the technical assistance,
advisory and trainings are payments for services. Thus, they are
considered as business profits and taxed under Article 7 of the tax
treaty.
Paragraph (1) of Article 7 provides:
"Article 7
taxable only in that Contracting State unless the
enterprise carries on business in the other Contracting
State through a permanent establishment situated
therein. If the enterprise carries on business as
that other Contracting State but only so much of them as
is attributable to that permanent establishment."
Based on paragraph 1, the profits of an enterprise of Japan
shall be taxable only in Japan unless the enterprise carries on
business in the Philippines through a permanent establishment
situated therein. If the enterprise carries on business as aforesaid,
the profits of the enterprise may be taxed in the Philippines but only
so much of them that is attributable to that permanent establishment.
Relative thereto, under paragraphs 1, 2, 3 and 6, Article 5 of
the treaty, a permanent establishment is defined as follows:
"Article 5
establishment' means a fixed place of business through
which the business of an enterprise is wholly or partly
carried on.
2. The term 'permanent establishment' includes especially:
a) a store or other sales outlet;
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a warehouse;
g) a mine, an oil or gas well, a quarry or other place of
extraction of natural resources.
3. A building site or construction or installation project
constitutes a permanent establishment only if it lasts
more than six months.
xxx xxx xxx
6. An enterprise of a Contracting State shall be deemed to
have a permanent establishment in the other
Contracting State if it furnishes in that other Contracting
State consultancy services, or supervisory services in
connection with a contract for a building, construction or
installation project through employees or other
personnel — other than an agent of an independent
status to whom paragraph 7 applies —, provided that
such activities continue (for the same project or two or
more connected projects) for a period or periods
aggregating more than six months within any
twelve-month period. However, if the furnishing of such
services is effected under an agreement between the
Governments of the two Contracting States regarding
economic or technical cooperation, that enterprise shall,
notwithstanding any provisions of this Article, not be
deemed to have a permanent establishment in that other
Contracting State." TCAScE
Based on the foregoing paragraphs, Nihon is deemed to have

a permanent establishment if it has a fixed place of business in the
Philippines through which its business is wholly or partly carried on,
such as, a store or other sales outlet, a branch, an office, a factory, a
workshop, and a warehouse, or if it undertakes activities relating to a
mine, an oil or gas well, a quarry or other place of extraction of
natural resources, or a building site or construction or installation
which continues for more than six months, or if it furnishes
consultancy services, or supervisory services in connection with a
contract for a building, construction or installation project for a period
or periods aggregating more than six months within any twelve-month
period.
Accordingly, since Nihon is not engaged in trade or business in
the Philippines to which a fixed place of business such as an office or
a branch is necessary, and since it did not provide the services in the
Philippines for a period or periods aggregating more than six months
within any twelve-month period, Nihon is not deemed to have a
permanent establishment with respect to such services. This being
the case, the service fees to be paid by Philippine
Parkerizing to Nihon under the Agreement are exempt from income
tax, pursuant to paragraphs 1, Article 7, in relation to paragraphs 1, 2,
3 and 6, Article 5, of the Philippines-Japan tax treaty, as amended.
As regards the royalty income, since Philippine Parkerizing is
not registered with the BOI and the royalties in question are not in
respect of the use of or the right to use cinematograph film or films or
tapes for radio or television broadcasting, such royalties to be paid
by Philippine Parkerizing to Nihon under the Agreement, being
essentially royalties for the use of, or the right to use of, the
trademark, patents and know-how of Nihon, are subject to income tax
at the rate of 10 percent of the gross amount of the royalties pursuant
to Article 12 paragraph 2 (b) of the same treaty.
Finally, the royalties and the service fees, being payments for
the use of intangible properties (patent, trademark, know-how) and
for the provision of services in the Philippines, shall be subject to
value-added tax ("VAT") under Section 108 (A) of the Tax Code,to
wit:
derived from the sale or exchange of
services, including the use or lease of properties:
Provided, that the President, upon the
recommendation of the Secretary of Finance,
shall, effective January 1, 2006, 2 raise the rate of
value-added tax to twelve percent (12%) . . ."
Relative thereto, Philippine Parkerizing shall withhold VAT at
the rate of 12 percent before remitting them to Nihon. Philippine
Parkerizing shall use BIR Form No. 1600 (Monthly Remittance
Return of Value-Added Tax and Other Percentage Taxes Withheld).
The duly filed BIR Form No. 1600 and its accompanying proof of
payment shall serve as documentary substantiation for Philippine
Parkerizing claim of input tax on the royalties and services. Otherwise,
if Philippine Parkerizing is not a VAT-registered taxpayer, it may treat
such VAT as an asset or expense, whichever is applicable. VAT
withheld shall be remitted within ten days following the end of the
insofar as the herein parties are concerned. cTDaEH
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
1.Protocol Amending the Convention between the Republic of the
Philippines and Japan for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income.
xxx xxx xxx
Withheld.
withholding agent.
March 25, 2015
Philippines-China tax
treaty
CSI Hotels, Inc.

2225 Tolentino St.
Pasay City
Attention: Wang Yung
Gentlemen :
This refers to your tax treaty application ("TTRA") filed on

March 14, 2013, requesting confirmation that royalties paid by CSI
Hotels Incorporated ("CSI") to Jinjiang Inn Co., Ltd. ("Jinjiang") are
subject to income tax at the rate of 10% pursuant to the Convention
between the Government of the Republic of the Philippines and the
Government of Peoples Republic of China with respect to Taxes on
Income.
It is represented that Jinjiang is a corporation organized and
existing under the laws of China with principal address at Room
101-103, 1121 Pujian Road, Pudong New Area, Shanghai, China and
is a resident thereof within the meaning of Philippines-China tax
treaty based on a Certificate of Registration as Taxpayer issued on
July 18, 2013 by the Shanghai Huangpu District State Administration
of Tax and Huangpu Office of Shanghai Local Tax Bureau; that it is
not registered either as a corporation or as a partnership in the
Philippines per Certification of Non-Registration of Company issued
by the Securities and Exchange Commission dated April 11, 2012;
that it is registered with the Intellectual Property Office of the
Philippines on October 23, 2006 with a trademark of Jin Jiang Inn +
Device and with certification number 4-2005-010450; and that, on the
other hand, CSI, an affiliate of Liwayway Marketing Corporation
(Liwayway), is a corporation organized and existing under the laws of
the Philippines with principal address at 2225 Tolentino St., Pasay
City.
It is also represented that on September 2, 2011, Jinjiang and
CSI entered into a Brand License Contract ("Agreement") by which
Liwayway acted as a surety; that under the Agreement,
Jinjiang grants to CSI the exclusive right and license to
operate Jinjiang Inn chain hotels within the Philippines as the
licensed territory and CSI may develop its own Regular Chains and
Franchise Chains according to the development targets in the
License Term as specified in the Agreement; that Jinjiang licenses
CSI to use the Licensed trademarks, trade name and mark and name
the Regular Chains and Franchise Chains in the Philippines, provide
technical specifications on operation and management and help CSI
meet the unified operation standards in accordance with
the Agreement; that Jinjiang warrants that it is entitled to grant the
license to CSI and that the use of the Licensed Brand in accordance
with the terms of this Agreement shall not infringe the intellectual
property rights of any third party; that Jinjiang shall charge brand
license fees for the hotels that CSI is licensed to operate under the
licensed brand and that CSI shall pay on time the amount as set out
in the Agreement; that within 30 days after the Agreement is
executed, CSI shall make a lump sum payment of US$150,000 as the
brand license fee for the License Term; that for each chain CSI
develops successfully, CSI shall pay Jinjiang US$5,000 for each
chain within sixty (60) days as the hotel software usage fee; that CSI
shall pay Jinjiang US$800 for each chain annually as
the software upgrade and maintenance fees. The first payment
of software upgrade and maintenance fees shall be made before
March 31st of the year following the one when CSI successfully
develops such chain and the same shall apply to the payment in the
subsequent years; that all information CSI obtains from its dealings
with Jinjiang, regardless of its form and aim, shall be deemed as
trade secret. However, the trade secret does not include: SEcAIC
1. Information that has been known to the public on the

execution date of the Agreement;
2. Information that can be proved to have been obtained
by CSI on the date Jinjiang conveys the information
to CSI; and
3. Information that is disclosed to CSI by a third party who
has the right to do so.
The parties also agreed that the Agreement shall be effective
for 15 years from September 2, 2011 to September 1, 2026 and the
Parties may early terminate or extend it in accordance with
the Agreement; that on September 28, 2011; that per notarized bank
certification issued by BDO and a sworn certification issued by CSI,
on September 28, 2011 Liwayway, the affiliate and surety of CSI,
paid the amount of One Hundred Twelve Thousand Five Hundred US
Dollars (USD112,500) to Jinjiangas CSI had no US Dollar account at
that time. However, Liwayway charged CSI the equivalent conversion
to Philippine Peso in the amount of Four Million Eight Hundred
Ninety-Nine Thousand Three Hundred Seventy-Five (P4,899,375.00)
per DM dated September 28, 2011; and that subsequently on
November 17, 2011 CSI paid Liwayway the amount of P4,899,375.00
per UCPB Check.
It is finally represented that, per sworn statement issued by the
president of CSI on November 29, 2013, that the issue or transaction
subject of this request for ruling is not under investigation, on-going
audit, administrative protest, claims for refund or issuance of a tax
credit certificate, collection proceedings, or judicial appeal.
Corporations. —
xxx xxx xxx
supplied)
xxx xxx xxx"
amended provides, viz.:
xxx xxx xxx
xxx xxx xxx
With respect to a treaty that may be invoked by Jinjiang and
other residents of China, there is the Philippines-China tax treaty.
Sections 1, 2 & 3 of Article 12 of the said treaty provide:
"Article 12
Royalties
that other State.
exceed:
broadcasting, or
or scientific experience.
by the Philippine competent authorities.
commercial, or scientific equipment, or for information
experience.
4. The provisions of paragraphs 1 and 2 shall not apply if the
beneficial owner of the royalties, being a resident of a
Contracting State, carries on business in the other
Contracting State in which the royalties arise, through a
permanent establishment situated therein, or performs
in that other State independent personal services from a
fixed base situated therein, and the right or property in
respect of which the royalties are paid is effectively
connected with such permanent establishment or fixed
base. In such case the provisions of Article 7 or Article
14, as the case may be, shall apply."
Based on the above-quoted provisions, the Philippines may tax
the royalties paid by a resident thereof to a company which is a
resident of China at a rate not exceeding 15 percent if the royalties
are paid in respect of the use of or the right to use cinematograph
films and films or tapes for radio and television broadcasting; and 10
percent 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. However, paragraphs
1 and 2 will not apply if Jinjiang has a permanent establishment in the
Philippines.
In relation thereto, paragraphs 1, 2 and 3 of Article 5 of the
treaty define a permanent establishment as follows: SCHTac
"Article 5
1. For the purposes of this Agreement, the term "permanent
establishment" means a fixed place of business through
carried on.
2. The term "permanent establishment" includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop; and
f) a mine, an oil or gas well, a quarry or any other place
of extraction of natural resources.
3. The term "permanent establishment" likewise encompasses:
a) a building site, a construction, assembly or installation
project or supervisory activities in connection
therewith, but only where such site, project or
activities continue for a period of more than 6
months;
b) an installation, drilling rig or ship used for the
exploration of natural resources, but only if so
used for a period of more than three months; and
c) the furnishing of services, including consultancy
services, by an enterprise through employees or
other personnel engaged by the enterprise for
such purpose, but only where activities of that
nature continue (for the same or a connected
project) within the country for a period or periods
aggregating more than 6 months within any
twelve-month period."
Accordingly, since Jinjiang is not engaged in trade or business
in the Philippines to which an office or a branch is necessary, and it
has no building site, installation and do not render services in the
Philippines for a period of more than 6 months,
then Jinjiang does not have a permanent establishment in the
Philippines.
In view thereof and considering that the royalties paid by CSI
to Jinjiang represent consideration for the use of the trademarks and
trade names of Jinjiang, this Office is of the opinion and so holds that
such royalty fees are subject to the 10 percent final withholding tax
rate pursuant to Article 12 (2) (b) of the Philippines-China tax treaty.
As regards the imposition of the VAT on royalties paid
to Jinjiang, please be informed further that Section 108 of the Tax
Code of 1997, as amended, provides as follows:
services, including the use or lease of
properties. HScCEa

performance of all kinds of services in the
Philippines for others for a fee, . . . The phrase
'sale or exchange of services' shall likewise
include:
(1) The lease or the use of or the right or privilege
to use any copyright, patent, design or
model, plan secret formula or process,
goodwill, trademark, trade brand or other
like property or right.
xxx xxx xxx"
Accordingly, CSI, being the resident withholding agent and
payor in control of the payment, shall be responsible for the
withholding of the 12 percent final VAT on such royalty before making
any payment to Jinjiang. In remitting the VAT withheld, CSI shall use
BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax
and Other Percentage Taxes Withheld). The duly filed BIR Form No.
1600 and proof of payment thereof shall serve as documentary
substantiation for the claim of input tax by CSI upon filing its own VAT
return, if it is a VAT-registered taxpayer. In case CSI is a non-VAT
registered taxpayer, the passed-on VAT withheld shall form part of
the cost of goods or properties purchased which may be treated as
an "expense" or as an "asset", whichever is applicable. In addition,
CSI is required to issue the Certificate of Final Income Tax Withheld
at Source (BIR Form No. 2306) in quadruplicate, the first three copies
thereof to be given to Jinjiang upon its request and the fourth copy to
be retained by CSI as its file copy. [Section 4.110.3 (b), Revenue
4.114-2, RR 16-05, as amended by RR 04-07)].
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Effective February 1, 2006 the rate shall be 12%.
June 27, 2012
Articles 13 (2) (b)

(iii), Philippines-United
States of America tax
treaty;
Article
12, Philippines-Czech tax
treaty
Mary Kay, Inc.

16251 Dallas Parkway
Addison, Texas, USA 75001
Attention: Patrick Cargo

Vice President, Corporate Tax
Gentlemen :

on January 30, 2012, applying for relief from double taxation on
the royalty payment made by Mary Kay Philippines, Inc.
("MK-Phil") to Mary Kay, Inc. ("MK-USA"), pursuant to Article 13 of
the Convention between the Government of the Republic of the
Respect to Taxes on Income ("Philippines-United States tax treaty").
It is represented that MK-USA with principal address at 16251
Dallas Parkway, Addison, Texas, USA 75001, is a resident of the
United States of America based on the certification issued by the
Internal Revenue Service, Department of the Treasury on March 28,
2011; that it is not registered either as a corporation or partnership in
the Philippines per certification issued by the Securities and
Exchange Commission dated September 30, 2011; and that, on the
other hand, MK-Phil is a corporation organized and existing under the
laws of the Philippines with principal address at 2nd Floor Allegro
center, 2284 Pasong Tamo Ext., Makati City 1231.
It is further represented that on March 1, 2010,
a Software License Agreement ("Agreement") was entered into
between MK-USA and MK-Phil whereby MK-USA grants MK-Phil a
limited, non-exclusive, non-transferable, perpetual limited license to
use the Software 1 in connection with its business operations; that in
consideration of the grant of license and the use of
the Software provided to MK-Phil, there shall be a one-time License
fee of US$717,157.99, but, MK-Phil may make partial payment of the
License fees and the full License fee amount must be paid within
three (3) years of MK-USA's invoice; that the Agreement shall
terminate automatically, without notice
to MK-Phil, upon MK-Phil's failure to cure its non fulfillment of any
material obligation within 10 business days of receipt of written notice
from MK-USA demanding cure.
It is finally represented, based on the Sworn Statement issued
by MK-Phil on December 14, 2011, that the transaction subject of the
involved.
the National Internal Revenue Code (Tax Code) of 1997, applies in
general to royalties derived in the Philippines by a nonresident
foreign corporation. It provides:
Corporations. —
xxx xxx xxx
emoluments or other fixed and determinable
annual, periodic or casual gains subject to tax
under subparagraphs 5(a): Provided, That
effective January 1, 2009, the rate of income tax
shall be thirty percent (30%)."ESCacI

amended, provides:
xxx xxx xxx
xxx xxx xxx
to the extent required by any obligation binding upon the
Thus, Article 13 of the Philippines-United States tax
treaty provides as follows:
"Article 13
ROYALTIES
of a third State.
scientific experience. The term "royalties" also includes
thereof."
and, in relation thereto, Article 12 (2) (a) of the Philippines-Czech
Republic tax treaty, which you invoked, provides:
"Article 12
ROYALTIES
that other State.
copyright of literary, artistic or scientific work,
other than that mentioned in sub-paragraph (b),
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
experience;
copyright of cinematograph films, and films or
tapes for television or radio broadcasting.
The competent authorities of the Contracting States shall by
mutual agreement settle the mode of application of
these limitations."
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. (BIR
Ruling No. DA-ITAD-52-03 dated April 8, 2003) AcHCED
In this regard, Article 23 of the Philippines-United States tax

"Article 23
following manner:
taxable year. For the purpose of applying the United
States credit in relation to taxes paid or accrued to the
Philippines, the rules set forth in Article 4 (Source of
Income) shall be applied to determine the source of
income. For purposes of applying the United States
credit in relation to taxes paid or accrued to the
Philippines, the taxes referred to in paragraphs 1(b) and
2 of Article 1 (Taxes Covered) shall be considered to be
income taxes."
On the other hand, Article 22 of the Philippines-Czech tax
"Article 22
1. In the case of a resident of the Czech Republic, double
taxation shall be eliminated as follows:
a) The Czech Republic, when imposing taxes on its
residents, may include in the tax base upon which
such taxes are imposed the items of income
which according to the provisions of this
Convention may also be taxed in the Philippines,
but shall allow as a deduction from the amount of
tax computed on such a base an amount equal to
the tax paid in the Philippines. Such deduction
shall not, however, exceed that part of the Czech
tax, as computed before the deduction is given,
which is appropriate to the income which, in
accordance with the provisions of this Convention,
may be taxed in the Philippines.
b) Where in accordance with any provision of the
Convention income derived by a resident of the
Czech Republic is exempt from tax in the Czech
Republic, the Czech Republic may nevertheless,
in calculating the amount of tax on the remaining
income of such resident, take into account the
exempted income."
As provided under their respective articles on Elimination of
Double Taxation of their tax treaties with the Philippines, the United
States and Czech Republic, both employ the same mechanism in
mitigating the effects of double taxation of foreign-sourced income
derived by their residents, that is, the ordinary credit method.
Under the ordinary credit method, the United States and Czech
(as countries of residence) would limit a taxpayer's allowable tax
credit to that portion of the taxpayer's tax liability in their countries that
is attributable to the income that is taxed in the Philippines (the
country of source or country of situs). As a result of this limitation, if
the Philippines has an effective tax rate that exceeds the effective tax
rate of the United States and Czech on a particular income, the
United States and Czech would not grant the taxpayer a full credit for
Relative thereto, please be informed that Section 14
of Revenue Memorandum Order ("RMO") No. 72-2010, published in
the Manila Bulletin on October 20, 2010, and effective November 4,
2010, provides that:
"Section 14. When and Where to File the TTRA. —
0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and
improperly filed.DCTSEA
Filing should always be made BEFORE the

transaction. Transaction for purposes of filing the TTRA
shall mean before the occurrence of the first taxable event.
period prescribed herein shall have the effect of
disqualifying the TTRA under this RMO." (Emphasis
Supplied)
In view thereof, since the TTRA was filed only on January 30,
2012, after the date of effectivity of the Agreement which was
on March 1, 2010, this Office hereby DENIES relief on all payments
under the Agreement made on or before the filing of the TTRA on
January 30, 2012 in violation of the requirement under RMO
72-2010 that filing of the TTRA should be made BEFORE the
transaction, that is the payment of license fees. Accordingly, said
payments shall be subject to tax at the rate provided for in Section 28
of the above-cited Tax Code of 1997, as amended.
However, license fees paid after the filing of the TTRA on
January 30, 2012 are GRANTED relief under Article 13 of
the Philippines-United States tax treaty, in relation to Article 12 of
the Philippines-Czech tax treaty. Accordingly, said payments are
subject to the preferential tax rate of 10 percent based on the gross
amount thereof pursuant to the Philippines-United States tax treaty,
in relation to the Philippines-Czech tax treaty.
Moreover, the said royalty payment by MK-Phil to MK-USA are
subject to the 12% value-added tax (VAT) under Section 108 of
the Tax Code, as amended, which provides as follows:
"Sec. 108. Value-added Tax on Sale of Services and
percent (10%) of the gross receipts derived from the sale or
Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
xxx xxx xxx
performance of all kinds or services in the Philippines for others
for a fee, remuneration or consideration, including . . . . The
phrase 'sale or exchange of services' shall likewise include:
trade brand or other like property or right;
xxx xxx xxx"
Accordingly, MK-Phil, being the resident withholding agent and
withholding of the 12 percent final VAT on such royalty before making
any payment to MK-USA. In remitting the VAT withheld, MK-Phil shall
No. 1600 and proof of payment thereof shall serve as documentary
substantiation for the claim of input tax by MK-Phil upon filing its own
VAT return, if it is a VAT-registered taxpayer. In case MK-Phil is a
non-VAT registered taxpayer, the passed-on VAT withheld shall form
part of the cost of goods or properties purchased which may be
treated as an "expense" or as an "asset", whichever is applicable. In
addition, MK-Phil is required to issue the Certificate of Final Income
Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the
first three copies thereof to be given to MK-USA upon its request and
the fourth copy to be retained by MK-Phil as its file copy. [Section
4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR
08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07)]
insofar as the herein parties are concerned. TEHIaD
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1."Software" shall mean the SAM E-Commerce 4.0 Software.
une 2, 2015
(Business Profits)
Philippines-Australia tax
treaty
Fujitsu Philippines, Inc.

2nd Floor, United Life Building
837 A. Arnaiz Avenue
Legaspi Village, Makati City
Attention: Mr. Peter G. Tan
President
Atty. Rodolfo R. Nicolas, Jr., CPA
In-house Legal Counsel
Gentlemen :

September 20, 2011, requesting confirmation that service fees paid
by Fujitsu Philippines, Inc. ("Fujitsu Philippines") to Fujitsu Australia
Ltd. ("Fujitsu Australia") are exempt from income tax pursuant to
the Agreement between the Government of the Republic of the
Philippines and the Government of Australia for the Avoidance of
to Taxes on Income ("Philippines-Australia tax treaty").
Facts
Fujitsu Australia is a foreign corporation resident of Australia
based on the company's constitution and on Certificate of Residency
issued by the Australian Taxation Office on June 9, 2011. It is
situated at 2 Julius Avenue, North Ryde, New South Wales,
Australia. Fujitsu Australia is engaged in the sale of computer
products (servers storage; client computing devices; peripheral
devices; software; car audio/video systems; air conditioners) and in
providing IT services (application services; business services;
managed infrastructure services; telecommunications; financial
services). Fujitsu Australia is not registered as a corporation or
partnership in the Philippines based on the Certification of
Non-registration of Company issued by the Securities and Exchange
Commission on September 22, 2011. On the other hand, Fujitsu
Philippines is a domestic corporation situated at 2nd Floor, United
Life Building, 837 A. Arnaiz Avenue, Legaspi Village, Makati City,
Philippines. It is engaged in the sale of computer products
(computing products; software; telecommunications; microelectronics
and electronic devices; OEM products) and in providing IT services
(systems integration; IT infrastructure services; managed
services; software services).
On November 5, 2010, Fujitsu Philippines and Fujitsu
Australia entered into an Off-Shore Services Agreement
where Fujitsu Australia agreed to provide services to Fujitsu
Philippines to be done entirely in Australia. The services consist of
two parts. The first part pertains to Asset Management Coordination
and Administration, which includes facilitation of IT procurement
(hardware and software) using existing customer processes and
existing vendor relationships; maintenance of software license
tracking register; IT hardware asset tracking; IT hardware forecasting;
and management of the leasing cycle of personal computers. The
second part pertains to Tier 1/Level 2 Onsite Support, which includes
assistance in transition activities requested by Fujitsu
Philippines' customers for the onboarding of new service providers;
performance of onsite support in Kuala Lumpur, Malaysia; assistance
in preparing regular reports; and providing recommendations on
service improvements applicable in sustaining support requirements
by customers. In consideration, Fujitsu Philippines will pay service
fee to Fujitsu Australia based on the following schedule:
Scope of
Period Number of Monthly Fee Total
Work
months
Both parts Nov 5-Dec 31, 1 AUD30,392.71AUD30,392.71

2010
First part Jan 1-Dec 31, 12 8,445.92 101,351.04
2011
Second part Jan 1-Dec 31, 12 8,116.00 97,392.00
2011
Based on the Certificate of Completion and Acceptance duly

signed by Fujitsu Philippines and Fujitsu Australia on October 16,
2014, both parties agreed that the services contemplated in the
Agreement were delivered completely by Fujitsu Australia to Fujitsu
Philippines.
Based on a certification issued by Mizuho Corporate Bank Ltd.
Manila Branch 1 on October 28, 2014, Fujitsu Philippines remitted a
total of AUD252,834.32 to Fujitsu Australia on November 10, 2011,
December 12, 2011 and February 8, 2012.
Ruling
In reply, please be informed that under Section 28 (B) (1) of the
National Internal Revenue Code of 1997, as amended ("Tax Code"),
business profits derived in the Philippines by a foreign corporation not
engaged in trade or business is subject to income tax at the rate of 30
percent, to wit:
"SEC. 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
(1) In General. — Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in
the Philippines shall pay a tax equal to thirty-five percent
(35%) of the gross income received during each taxable
year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities, emoluments
or other fixed or determinable annual, periodic or casual
gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraph 5(c) and
(d) above: n Provided, That effective January 1, 2009,
the rate of income tax shall be thirty percent (30%)."
However, under Section 32 (B) (5) of the Tax Code, the profits
are exempt or partially exempt to the extent required by any treaty
obligation on the Philippines, to wit:
xxx xxx xxx
(B) Exclusions from Gross Income. — The following items shall
not be included in gross income and shall be exempt
from taxation under this Title:
xxx xxx xxx
to the extent required by any treaty obligation
In this connection, paragraph 1, Article 7 of the
Philippines-Australia tax treaty provides relief to profits derived by an
Australian enterprise, to wit:
"Article 7 Business Profits
1. The profits of an enterprise of one of the Contracting States
shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State
through a permanent establishment situated therein. If
the enterprise carries on business as aforesaid, the
profits of the enterprise may be taxed in the other State,
but only so much of them as is attributable to —
a) that permanent establishment; or"
Under this article, such profits may be taxed in the Philippines if
attributable to a permanent establishment which the enterprise has in
the Philippines. On the question of permanent establishment,
paragraphs 1 and 2, Article 5 of the treaty defines this term below:
"Article 5 Permanent Establishment
1. For the purposes of this Agreement, the term 'permanent
carried on.
2. The term 'permanent establishment' shall include especially
—
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, oil or gas well, quarry or other place of
extraction of natural resources;
g) an agricultural, pastoral or forestry property;
h) a building site or construction, installation or
assembly project, or supervisory activities in
connection therewith where such site, project or
activity continues for more than six months;
i) premises used as a sales outlet;
j) a warehouse, in relation to a person providing storage
facilities for others;
k) a place in one of the Contracting States through
which an enterprise of the other Contracting State
furnishes services, including consultancy
services, for a period or periods aggregating
more than six months in any taxable year or year
of income, as the case may be, in relation to a
particular project, or to any project connected
therewith."
partly carried on, and includes especially, a place of management, a
branch, an office, a factory and a workshop. In the case of furnishing
of services, this activity constitutes a permanent establishment if the
concerned enterprise furnishes services, including consultancy
services, in the Philippines for a period or periods aggregating more
than six months in any taxable year or year of income, as the case
may be, in relation to a particular project, or to any project connected
therewith.
Accordingly, since Fujitsu Australia is not engaged in trade or
business in the Philippines to which a fixed place of business like
an office or a branch is necessary, and it did not furnish services in
the Philippines but elsewere, Fujitsu Australia is not deemed to have
a permanent establishment in the Philippines pursuant to paragraphs
1 and 2, Article 5 of the Philippines-Australia tax treaty. This being so,
the service fees paid by Fujitsu Philippines to Fujitsu Australia under
the Off-Shore Services Agreement, for undertaking and completing
the asset management coordination and administration (first part)
and onsite support (second part) of the project, are exempt from
income tax pursuant to paragraph 1, Article 7 of the
Philippines-Australia treaty.
On the characterization of the service fees as business
profits (which are generally exempt from income tax) rather
than payments for know-how or royalties (which are generally subject
to a reduced income tax), the following commentaries of
the Organization for Economic Co-operation and Development Model
Tax Convention on Income and on Capital (Condensed Version, July
22, 2010) mention that:
"11.1 In the know-how contract, one of the parties agrees to
account, his special knowledge and experience which remain
unrevealed to the public. It is recognised that the grantor is
not required to play any part himself in the application of the
formulas granted to the licensee and that he does not
11.2 This type of contract thus differs from contracts for the
provision of services, in which one of the parties undertakes
the purpose of making that distinction:
— Contracts for the supply of know-how concern information
of the kind described in paragraph 11 that already exists or
concern the supply of that type of information after its
development or creation and include specific provisions
— In the case of contracts for the provision of services, the
supplier undertakes to perform services which may require
the use, by that supplier, of special knowledge, skill and
expertise but not the transfer of such special knowledge, skill
or expertise to the other party.
— In most cases involving the supply of know-how, there
would generally be very little more which needs to be done by
the supplier under the contract other than to supply existing
information or reproduce existing material. On the other hand,
a contract for the performance of services would, in the
expenditure by the supplier in order to perform his contractual
salaries and wages for employees engaged in researching,
designing, testing, drawing and other associated activities or
payments to sub-contractors for the performance of similar
services." (Pages 225-226)
subcontractors for the performance of similar services.
Accordingly, since the Agreement does not call for Fujitsu
Australia to supply existing information or reproduce existing material
to Fujitsu Philippines, but for the former to provide actual services
to Fujitsu Philippines as described above, this agreement is clearly a
contract for the performance of services and not for the supply of
know-how or other royalty-bearing property. Moreover, by reason that
the services were rendered continuously for more than one year
(November 2010 to December 2011) by designated personnel of
Fujitsu Australia at its facilities and that Fujitsu Australia utilized its
resources for this purpose, it is certain that a greater level of
expenditure (such as salaries and other remuneration of personnel)
was incurred by Fujitsu Australia to fulfil its contractual obligations
to Fujitsu Philippines. This being the case, the service fees paid
to Fujitsu Australia constitute business profits and not payments for
know-how or royalties.
Furthermore, under Section 108 (A) of the Tax Code the
service fees paid for services rendered by Fujitsu Australia entirely
outside the Philippines are exempt from value-added tax ("VAT"), to
wit:
"SEC. 108. Value-added Tax on Sale of Services and Use or
Lease of Properties. —
tax to twelve percent (12%). . ."
performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration. . ."
Under the cross-border or destination principle, the sale of
services is subject to VAT only if the services are performed in the
Philippines.
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
1.Situated at 26th Floor, Citibank Tower, Valero corner Villar Streets,
Salcedo Village, Makati City, Philippines.
nNote from the Publisher: The phrase "and (d) above" no longer appears
October 1, 2013
Article
relation to Section 32 (B)
(5) of the Tax Code of
1997, as amended
Salvador & Associates

815-816 Tower One & Exchange Plaza
Ayala Triangle, Ayala Avenue, Makati City
Attention: Atty. Gerardo V. Francisco

Authorized Representative
Gentlemen :
This refers to your tax treaty relief application filed on June 29,
2012 requesting confirmation that the royalty payments made
to Lotte Co., Ltd. ("Lotte Japan'') by Lotte Confectionery Pilipinas
Corporation ("Lotte Phil") are subject to preferential tax rate of 10
percent pursuant to the Convention between the Republic of the
Prevention of Fiscal Evasion with Respect to Taxes on Income as
amended by a Protocol 1 ("Philippines-Japan tax treaty").
It is represented that Lotte Japan is a Japanese corporation
with address at 20-1 Nishi-Shinjuku 3-Chome, Shinjuku-ku, Tokyo,
Japan, based on the Declaration of Residence dated March 26, 2012,
issued by the Shinjuku Tax Office of Japan; that Lotte Japan is not
the Securities and Exchange Commission dated July 9, 2012; and
that on the other hand, Lotte Phil is a domestic corporation with
address at Unit 1702, Hanson Square Building, No. 17 San Miguel
Avenue, Ortigas Center, Pasig City.
It is further represented that on April 1, 2012, Lotte
Japan and Lotte Phil entered into a License Agreement
("Agreement") whereby Lotte Japan granted Lotte Phil a license to
manufacture and sell certain confectionary products in the Philippines
by using certain formulation and technology ("Know-how") for
manufacturing and selling the products under Lotte Japan's
trademarks; that for and in consideration of such license, Lotte
Phil shall pay Lotte Japan 1.0% of net ex-factory sales less sales
commissions, volume discounts, and the sales for the specified
companies specified by Lotte Japan, actually granted (Net Sales)
accrued for each such category during such calendar-half-year as the
license fee, payable within 30 days after the end of each
calendar-half-year during the term of the Agreement; that any such
payment shall be made exclusive of any bank charges; and
that royalty payments were made on August 17, 2012 based on the
Certificate of Remittance issued by the Bank of Tokyo-Mitsubishi UFJ
on November 8, 2012. SCHcaT

proceedings, or a judicial appeal based on the Certification issued
by Lotte Japan on May 8, 2012.
In reply, please be informed that royalties payable to Lotte
Japan, being a foreign corporation not engaged in trade or business
in the Philippines, are subject to income tax at a rate of 30 percent
1997 ("Tax Code"), as amended, provides:
—...
Philippines. Section 32 (B) (5) of the Code provides: ScTIAH

xxx xxx xxx
any kind, to the extent required by any treaty obligation
Thus, you invoke the Philippines-Japan tax treaty.
With respect to royalties, Paragraphs 1, 2, 3 and 4, Article 12
thereof provide:
"Article 12
owner of the royalties the tax so charged shall not exceed:
royalties if the royalties are paid in respect of the use
of or the right to use cinematograph films and films or
tapes for radio or television broadcasting; aETAHD
b) 10 per cent of the gross amount of the

experience.
xxx xxx xxx"
guarantee the result thereof. IEcDCa

— Contracts for the supply of
know-how concern information of that kind described
in paragraph 11 that already exists or concern
the supply of that type of information after its
development or creation and include specific
provisions concerning the confidentiality of that
information.
— In the case of contracts for the provision of
services, the supplier undertakes to perform services
which may require the use, by that supplier, of special
knowledge, skill and expertise but not the transfer of
such special knowledge, skill or expertise to the other
party.
know-how, there would generally be very little more
which needs to be done by the supplier under the
contract other than to supply existing information or
reproduce existing material. On the other hand, a
contract for the performance of services would, in the
expenditure by the supplier in order to perform his
contractual obligations. For instance, the supplier,
depending on the nature of the services to be rendered,
may have to incur salaries and wages for employees
engaged in researching, designing, testing, drawing
and other associated activities or payments to
services. HSATIC

— payments obtained as consideration for
after-sales service,
— payments for services rendered by a seller to
the purchaser under a warranty,
— payments for a list of potential customers,
when such a list is developed specifically for the payer
out of generally available information (a payment for
the confidential list of customers to which the payee
has provided a particular product or service would,
however, constitute a payment for know-how as it
would relate to the commercial experience of the
payee in dealing with these customers),
— payments for an opinion given by an
engineer, an advocate or an accountant, and
— payments for advice provided electronically,
for electronic communications with technicians or for
information in response to frequently asked questions
or common problems that arise frequently." (Pages
225-226) DAHCaI
generally be very little more which needs to be done by Lotte
Japan under the contract other than to supply existing information or
level of expenditure by Lotte Japan in order to perform his contractual
obligations.
Under paragraphs 2 and 3 of Article 12 of
the Philippines-Japan tax treaty, royalties arising in the Philippines
and paid to a resident of Japan may be taxed in the Philippines at a
rate not to exceed (a) 15 percent of the gross amount of the royalties
if they are paid in respect of the use or the right to use of
cinematograph films and films or tapes for radio or television
broadcasting; (b) 10 percent of the gross amount of the royalties if
they are paid by a domestic company registered with the Board of
Investments and engaged in preferred pioneer areas of investment
under the investment incentives laws of the Philippines; and (c)
before January 1, 2009, 25 percent of the gross amount of the
royalties in all other cases and beginning January 1, 2009, 10 percent
of the gross amount of the royalties in all other cases. Under
paragraph 4 of Article 12, the term Royalties 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 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 ("Know-how").
Considering that Lotte Phil is not a BOI-registered enterprise
engaged in preferred pioneer areas of investment and the subject
royalties are not payments in respect of the use or right to use
broadcasting, this Office of the opinion and so holds that the said
payments by Lotte Phil to Lotte Japan under
the Agreement are royalty payments in consideration for the right to
use of any patent, trade mark, design or model, plan, secret formula
or process, and as such are subject to the preferential tax rate of 10
percent of the gross amount of royalties pursuant to Article 12 (2) (b)
of the Philippines-Japan tax treaty.
Furthermore, the royalty payments made by Lotte Phil are
subject to the 12% value-added tax (VAT) pursuant to Section 108
of the National Internal Revenue Code of 1997, as amended.
Accordingly, Lotte Phil, being the payor in control of the payment
shall be responsible for the withholding of VAT on the
said royalty payments on behalf of Lotte Japan by filing a separate
VAT return for and on behalf of Toyota Japan using BIR Form No.
1600 (Monthly Remittance Return of Value-Added Tax and Other
Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof
of payment thereof shall serve as sufficient basis for the claim of input
tax to be applied against the output tax that may be due from Lotte
Phil, if it is a VAT registered taxpayer. In case Lotte Phil is a non-VAT
the cost of the service purchased or treated as an "expense" or an
"asset", whichever is applicable. In addition, Lotte Phil is required to
issue the Certificate of Final Tax Withheld at Source (BIR Form No.
2306) in quadruplicate, the first three copies thereof to be given
to Lotte Japan upon its request, and the fourth copy to be retained
by Lotte Phil as its copy. [Section 4.110.3 (b), Revenue Regulations
No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR
16-05, as amended by RR 04-07)] DIETcC

Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Protocol Amending the Convention between the Republic of the Philippines
and Japan for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income effective January
1, 2009.
||| (ITAD BIR Ruling No. 288-13, [October 1, 2013])
June 10, 2014
Philippines-USA tax treaty
19th and 20th Floors
Tower 1, The Enterprise Center
6766 Ayala Avenue
1200 Makati City
Attention: Lina P. Figueroa

Principal, Tax Advisory & Compliance
Gentlemen :
This refers to your tax treaty application ("TTRA") filed on July

12, 2013, requesting confirmation that royalties paid
by TelePhilippines, Inc. ("TelePhilippines") to Teleperformance
Group, Inc. ("Teleperformance") are subject to income tax at the rate
of 10% pursuant to the Convention between the Government of the
Republic of the Philippines and the Government of the United States
of America with respect to Taxes on Income (Philippines-USA tax
treaty). CEcaTH
It is represented that Teleperformance is a non-resident

foreign corporation organized and existing under the laws of United
States of America with business address at 1601 Washington
Avenue, Suite 400, Miami Beach, FL 33180, USA; that it is not
registered as a corporation or a partnership in the Philippines per
certification of non-registration issued by the Securities and
Exchange Commission on July 8, 2013; and that, on the other
hand, TelePhilippines is a domestic corporation organized and
existing under the laws of the Philippines with principal address at 12
Floor, Octagon Building, San Miguel Avenue, Ortigas Center, Pasig
City.
It is also represented that on January 1,
2009, Teleperformance and TelePhilippines entered into
an Intangible and Proprietary Property Licensing Agreement
(Agreement) whereby Teleperformance grants to TelePhilippines a
non-exclusive, non-transferable, royalty-bearing, limited license (with
the right to sublicense only as provided under the Agreement):
1. To use the Trademarks in connection with the Services
in the Territory and, as applicable from time to time,
the Additional Territories, subject to the terms and
conditions of this Agreement;
2. To (i) reproduce, create derivative works of, distribute,
publicly perform, publicly display, digitally transmit,
and otherwise use the Intangible Property in any
medium or format and (ii) use, make, and have
made any product and perform any process;
3. To internally use the object code version of
the Software in connection with the Services in the
Territory and, as applicable from time to time the
Additional Territories, in each case subject to the
terms and conditions of this Agreement.
It is further represented that Teleperformance further grants
to TelePhilippines the right to sublicense the rights in the Intangible
Property granted to TelePhilippines to
each TelePhilippines Subsidiary, whether in the Territory or in an
Additional Territory, subject to the prior consent
of Teleperformance and TelePhilippines; that as consideration for the
rights granted under this Agreement, TelePhilippines shall
pay Teleperformance an annual royalty payable in quarterly
installments in an amount equal to 2.7% of the aggregate
Accumulated Gross Revenues of TelePhilippines and
each TelePhilippines Subsidiary. The royalty shall be paid
to Teleperformance within 15 calendar days following the end of each
calendar quarter, based upon the aggregate Accumulated Gross
Revenues of TelePhilippines each TelePhilippines Subsidiary from
the immediately preceding quarter and any of the aggregate
Accumulated Gross Revenues
of TelePhilippines each TelePhilippines Subsidiary from any other
calendar quarters with respect to which the royalty has not been paid;
that on July 19, 2013 TelePhilippines remitted through BDO Karrivin
Plaza-Chino Roces Avenue Extension Branch the amount of
US$ One Million Two Hundred Thousand Seven Hundred Ninety One
(US$1,260,791.00) n to JP Morgan Chase Bank N.A. in favor
of Teleperformance per notarized certification issued by BDO on
August 14, 2013.
It is finally represented that, per sworn statement issued
by TelePhilippines on June 28, 2013, that the issue or transaction
subject of this request for ruling is not under investigation, on-going
audit, administrative protest, claims for refund or issuance of a tax
credit certificate, collection proceedings, or judicial appeal.
SaIEcA

Corporations. —
xxx xxx xxx
supplied)
xxx xxx xxx"
amended provides, viz.:
xxx xxx xxx
xxx xxx xxx
Thus, the Philippines-USA tax treaty, which you invoked may
apply in this case. It provides:HADTEC
"Article 13
Royalties
State may be taxed by both Contracting States.
of a third State.
"royalties" also includes gains derived from the sale,
thereof.
xxx xxx xxx"
Under Section 2 (b) (iii) of the above-quoted provision, the
Philippines may tax the royalties paid by a resident thereof to a
company which is a resident of USA at 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, this is also
called as the "most-favored-nation" clause. DEAaIS
For this purpose, Article 12 Section 2 (a) of the

Philippines-UAE tax treaty applies which imposes a tax not
exceeding 10 percent of the gross amount of the royalties payable by
a Philippine company to a resident of UAE, to wit:
"Article 12
Royalties
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
that State, but if the beneficial owner of the royalties is a
resident of the other Contracting State, the tax so
charged shall not exceed 10 per cent of the gross
amount of the royalties. The competent authorities of the
Contracting States shall, by mutual agreement, settle
the mode of application of this limitation.
xxx xxx xxx"
In relation thereto, 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 (SC)
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. (BIR Ruling No. DA-ITAD-52-03 dated April 8, 2003).
Furthermore, the Supreme Court required two conditions for this
clause to apply. First, the royalties arising in the Philippines and paid
to a resident of the United States must be of the same kind as those
derived in the Philippines by a resident of a third State and to which
the tax treaty between the Philippines and the third State subjects the
latter royalties to a most-favored-nation treatment, which is currently
at 10 percent. Second, the royalties paid to the United States resident
must be paid under similar circumstances vis-à-vis those royalties
paid to the resident of the third State, which can be determined by
considering the amount of foreign tax credit or deduction which the
United States and the third State allow its residents with respect to
the royalties. In this connection, the royalties are not paid under
similar circumstances if the credit or deduction allowed by the third
State is more than the actual amount of income tax of 10 percent as
that provided in the article on Royalties of the treaty between the
Philippines and the third State. The pertinent portion of the S.C.
Johnson case reads: TEAcCD
"The purpose of a most favored nation clause is to

grant to the contracting party treatment not less favorable
than that which has been or may be granted to the 'most
favored' among other countries. The most favored nation
clause is intended to establish the principle of equality of
international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges
accorded by either party to those of the most favored nation.
The essence of the principle is to allow the taxpayer in one
state to avail of more liberal provisions granted in another tax
treaty to which the country of residence of such taxpayer is
also a party provided that the subject matter of taxation, in
this case royalty income, is the same as that in the tax treaty
under which the taxpayer is liable. Both Article 13 of the
RP-US Tax Treaty and Article 12(2)(b) of the RP-West
Germany Tax Treaty, above-quoted, speaks of tax on
royalties for the use of trademark, patent, and technology.
The entitlement of the 10% rate by U.S. firms despite the
absence of a matching credit (20% for royalties) would
derogate from the design behind the most favored nation
clause to grant equality of international treatment since the
tax burden laid upon the income of the investor is not the
same in the two countries. The similarity in the circumstances
of payment of taxes is a condition for the enjoyment of most
We accordingly agree with petitioner that since the
RP-US Tax Treaty does not give a matching tax credit of 20
payment of taxes on royalties under similar circumstances."
Concerning the first condition, the non-exclusive,
non-transferable, royalty-bearing, limited license (i) to use the
Trademarks of Teleperformance; (ii) to reproduce, create derivative
works of, distribute, publicly perform, publicly display, digitally
transmit, and otherwise use the Intangible Property in any medium or
format; and (iii) to use, make, and have made any product and
perform any process, (iv) to internally use the object code version of
the Software, are within the definition of royalties under the articles
on royalties under the Philippines-USA and Philippines-UAE tax
treaties. Hence, the first condition is satisfied.
The second condition is likewise satisfied as paragraph 1,
Article 23 of the Philippines-USA tax treaty, and paragraph 2, Article
23 of the Philippines-UAE tax treaty both employ the same
mechanism in mitigating the effects of double taxation of
foreign-sourced income derived by their residents, that is, the
ordinary credit method. The said provisions provide, to wit:
USA: aHCSTD
"Article 23
Double taxation of income shall be avoided in the following
manner:
taxable year. For the purpose of applying the United
States credit in relation to taxes paid or accrued to the
Philippines, the rules set forth in Article 4 (Source of
Income) shall be applied to determine the source of
income. For purposes of applying the United States
credit in relation to taxes paid or accrued to the
Philippines, the taxes referred to in paragraphs 1(b) and
2 of Article 1 (Taxes Covered) shall be considered to be
income taxes.
xxx xxx xxx"
UAE:
"Article 23
Elimination of Double Taxation
xxx xxx xxx
2. In the case of the United Arab Emirates, double
taxation shall be eliminated as follows:
Where a resident of the United Arab Emirates derives
income which in accordance with the provisions of this
Agreement, may be taxed in the Philippines, the United Arab
Emirates shall allow as a deduction from tax on income of
that person an amount equal to the tax on income paid in the
Philippines."
Under the ordinary credit method, USA and UAE (as countries
of residence) would limit a taxpayer's allowable tax credit to that
portion of the taxpayer's tax liability in their countries that is
attributable to the income that is taxed in the Philippines (the country
of source or country of situs). As a result of this limitation, if the
Philippines has an effective tax rate that exceeds the effective tax
rate of USA and UAE on a particular income, USA and UAE would
not grant the taxpayer a full credit for the income tax imposed by the
Philippines on such income. cACEaI
Accordingly, the royalties paid

by TelePhilippines to Teleperformance are subject to the preferential
tax rate of 10 percent based on the gross amount thereof pursuant to
the Article 13 of the Philippines-USA tax treaty, in relation to Article
12 of the Philippines-UAE tax treaty.
to Teleperformance, please be informed further that Section 108 of
the Tax Code of 1997, as amended, provides as follows:
Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any
of the following conditions has been satisfied:
xxx xxx xxx
others for a fee . . . The phrase 'sale or exchange of services'
shall likewise include:
trade brand or other like property or right;
xxx xxx xxx"
Accordingly, TelePhilippines, being the resident withholding
agent and payor in control of the payment, shall be responsible for
the withholding of the 12 percent final VAT on such royalty before
making any payment to Teleperformance. In remitting the VAT
withheld, TelePhilippines shall use BIR Form No. 1600 (Monthly
input tax by TelePhilippines upon filing its own VAT return, if it is a
VAT-registered taxpayer. In case TelePhilippines is a non-VAT
an "expense" or as an "asset", whichever is applicable. In
addition, TelePhilippines is required to issue the Certificate of Final
Income Tax Withheld at Source (BIR Form No. 2306) in
quadruplicate, the first three copies thereof to be given
to Teleperformance upon its request and the fourth copy to be
retained by TelePhilippines as its file copy. [Section 4.110.3 (b),
Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now
Section 4.114-2, RR 16-05, as amended by RR 04-07)].
and effect insofar as the herein parties are concerned. EHDCAI
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
n Note from the Publisher: Copied verbatim from the official copy.
Discrepancy between amount in words and in figures.
June 16, 2010
Article
12, Philippines-Japan Tax
Treaty;
Article
10, Philippines-Japan Tax
Treaty;
BIR Ruling No.
No. ITAD-008-99;
ITAD Ruling No.
020-99; BIR Ruling No.
DA-ITAD-041-99;
BIR Ruling No.
DA-ITAD-047-99; BIR
Ruling No. 096-81;
BIR Ruling No.
DA-ITAD-98-05; BIR
Ruling No. DA-ITAD-60-06;
BIR Ruling No.
DA-ITAD-102-06; BIR
Ruling No. DA-ITAD-65-08
Isla Lipana & Co.

29th Floor Philamlife Tower
8767 Paseo de Roxas
1226 Makati City
Attention: Ms. Malou P. Lim
Gentlemen :
This refers to your letter dated June 18, 2009 regarding

the royalty and dividend payments made by TOSHIBA
INFORMATION EQUIPMENT (PHILIPPINES),
INC. (Toshiba-Philippines) to TOSHIBA
CORPORATION (Toshiba-Japan).
It is represented that Toshiba-Japan is a nonresident foreign
corporation organized and existing under the laws of Japan as
evidenced by the Certificate of Status of Taxable Person dated March
30, 2009 issued by the District Director of Shiba Tax Office, Japan;
that its principal office is located at 1-1, Shibaura 1-Chome,
Minato-ku, Tokyo 105-8001, Japan; that Toshiba-Japan is engaged
in the manufacture of certain kinds of hard disk drives and printed
circuit boards for personal computers and possesses certain
technical information and patents relating thereto; that it is not
Philippines as evidenced by the Certificate of Non-Registration dated
June 15, 2009 issued by the Securities and Exchange Commission
(SEC); on the other hand, Toshiba-Philippines is a domestic
corporation with principal office address located at 103 East Main
Avenue, SEPZ, Laguna Technopark, Biñan, Laguna; and that it is
registered with the Philippine Economic Zone Authority (PEZA) under
Certificate of Registration No. 95-99 and is primarily engaged in the
business of manufacturing, assembling, importing, and exporting
among others, office automation and information technology,
including all types of computer-based equipment and systems,
computer hardware and software of all kinds; and that it currently
manufactures hard disk drives.
On the Royalty Payments:
It is represented that Toshiba-Philippines entered into a
Technical Collaboration Agreement (Agreement)
with Toshiba-Japan on June 6, 1996 under
which Toshiba-Japan agreed to furnish Toshiba-Philippines technical
information, technical services and a license to manufacture Contract
Products 1 under Toshiba-Japan patents; that under the Original
Agreement, Toshiba-Philippines shall pay Toshiba-Japan under the
following formula:
a) For hard disk drives:
Number of Contract Products x 3.0% x Net Sales
b) For optical disk drives:
c) For printed circuit board for personal computers:
That the Original Agreement's term shall expire 5 years after or
on June 12, 2001. This was renewed from June 13, 2001 until
September 30, 2006. Then again, it was renewed for another five (5)
years beginning October 1, 2006 up to September 30, 2011. This
time, under the Agreement, the Contract Product is only limited to
hard disk drives. Confirmation is being requested on
the royalty payments made by Toshiba-Philippines to Toshiba-Japan,
under the Agreement, be subjected to the preferential treaty rate for
royalties pursuant to paragraph (2) of Article 12 of
the Philippines-Japan tax treaty, as amended by the Protocol.
On the Dividend Payments:
Toshiba-Philippines is represented as a wholly-owned
subsidiary of Toshiba-Japan; that as a
shareholder, Toshiba-Japan also receives dividends
from Toshiba-Philippines; that in a meeting held on January 23, 2009,
the Board of Directors of Toshiba-Philippines declared cash
dividends in the total amount of United States Dollars Two Million
Three Hundred Thirty-Eight Thousand (US$2,338,000) payable to all
stockholders on record not later than February 27, 2009; that in a
subsequent meeting on March 5, 2009, the Board of Directors
of Toshiba-Philippines declared cash dividends in the amount of
United States Dollars Fourteen Million One Hundred Thousand
(US$14,100,000) payable to all stockholders on record not later than
March 31, 2009; thatToshiba-Japan is the direct and beneficial owner
of Two Million Three Hundred Forty-One Thousand Nine (2,341,009)
shares in Toshiba-Philippines with par value of Php1,000 per share
representing 99.9% of the total issued and outstanding shares
in Toshiba-Philippines as of March 31, 2009; and that, the dividends
paid by Toshiba-Philippines to Toshiba-Japan be also entitled to the
preferential rate of 10%.
Lastly, the issue or transaction subject of the above application
is not under investigation, on-going audit, administrative protest,
proceedings, or a judicial appeal.
In reply, please be informed that a foreign corporation
like Toshiba-Japan, whether or not engaged in trade or business in
the Philippines, is taxable only on income derived in the Philippines
(Section 23, National Internal Revenue Code of 1997, as amended,
[Tax Code]). Since Toshiba-Japan is not engaged in trade or
business in the Philippines based on the Certificate of
Non-Registration issued by the SEC, such income derived
by Toshiba-Japan in the Philippines is generally subject to income
tax at the rate of 35% based on the gross amount thereof. Section 28
(B) (1) of the Tax Code provides:
Corporations. —
xxx xxx xxx
subparagraph 5(c): Provided, That effective
thirty percent (30%).
xxx xxx xxx"
However, Section 32 (B) (5) of the Tax Code of the 1997, as
amended, provides:
xxx xxx xxx
xxx xxx xxx
(5) Income Exempt under Treaty. — Income of any
kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines.
xxx xxx xxx"
For the Royalty Payments:
Prior to the amendment of the Philippines-Japan tax treaty on
December 9, 2006 which took effect on January 1, 2009, said tax
treaty provides, to wit:
"Article 12
laws of that Contracting State, but if the recipient is the
beneficial owner of the royalties the tax so charged shall not
exceed:
royalties if the royalties are paid in respect of
the use of or the right to use cinematograph
films and films or tapes for radio or television
broadcasting;
xxx xxx xxx
amount of tax imposed by the Philippines on the royalties
paid by a company, being a resident of the Philippines,
registered with the Board of Investments and engaged in
preferred pioneer areas of investment under the investment
incentives laws of the Philippines to a resident of Japan, who
is the beneficial owner of the royalties, shall not exceed 10
per cent of the gross amount of the royalties.
scientific work including cinematograph films and films or
tapes for radio or television broadcasting, any patent, trade
mark, design or model, plan, secret formula or process, or for
scientific equipment or for information concerning industrial,
xxx xxx xxx."
Based on the foregoing, royalties arising in the Philippines and
derived by a resident in Japan may be taxed in Japan (par. 1).
However, the same royalties may also be taxed in the Philippines but
the rate of income tax that may be imposed thereon will not exceed
10 percent if the payor is a Board of Investments (BOI)-registered
enterprise and engaged in preferred pioneer areas of investment, 15
percent if the payments are in respect of the use of or the right to use
broadcasting, and in all other cases, 25 percent of the gross amount
of the royalties. (pars. 2 & 3)
The Protocol amending the Philippines-Japan tax treaty which
took effect on January 1, 2009 provides:
"ARTICLE V
Paragraph (2) of Article 12 of the Convention shall be
deleted and replaced by the following:
(2) However, such royalties may also be taxed in the
laws of that Contracting 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 in respect
of the use of or the right to use cinematograph
broadcasting;
(b) 10 per cent of the gross amount of
the royalties in all other cases."
Based on the foregoing provisions, the royalty payments will be
taxed on the preferential tax rate of 15 percent if the payments are in
respect of the use of or the right to use cinematograph films and films
or tapes for radio or television broadcasting, and in all other cases, 10
percent of the gross amount of the royalties.
Such being the case, this Office is of the opinion and so holds
that since Toshiba-Philippines is not a BOI-registered enterprise
engaged in preferred pioneer areas of investment, and, since the
subject royalty payments are not paid in respect of the use of or the
right to use cinematograph films and films or tapes for radio or
television broadcasting, the said royalty payments
by Toshiba-Philippines to Toshiba-Japan under the existing
Agreement shall be subject to tax at the rate not exceeding 25
percent of the gross amount of the royalties, pursuant to Article 12 (2)
(b) of the Philippines-Japan tax treaty from October 1, 2006 until
December 31, 2008. (BIR Ruling No. 096-81 dated June 11,
1981; BIR Ruling No. DA-ITAD-98-05 dated September 7, 2005; BIR
Ruling No. DA-ITAD-60-06 dated May 30, 2006; BIR Ruling No.
DA-ITAD-102-06 dated August 28, 2006; and BIR Ruling No.
DA-ITAD 065-08 dated September 10, 2008)
On the other hand, the royalty payments from January 1, 2009
up to September 30, 2011 under the existing Agreement shall be
subject to 10 percent preferential tax rate pursuant to the Protocol.
On the Dividend Payments:
Article 10 of the Philippines-Japan tax treaty provides:
"Article 10
1. Dividends paid by a company which is a resident of
a Contracting State to a resident of the other Contracting
State may be taxed in that other Contracting State.
2. However, such dividends may also be taxed in the
Contracting State of which the company paying the dividends
is a resident, and according to the laws of that Contracting
State, but if the recipient is the beneficial owner of the
dividends the tax so charged shall not exceed:
dividends if the beneficial owner is a company
which holds directly at least 25 per cent either of
the voting shares of the company paying the
dividends or of the total shares issued by that
company during the period of six months
immediately preceding the date of payment of
the dividends;
dividends in all other cases.
The provisions of this paragraph shall
not affect the taxation of the company in respect
of the profits out of which the dividends are
paid.
xxx xxx xxx
4. The term "dividends" as used in this Article means
income from shares or other rights, not being debt-claims,
participating in profits, as well as income from other corporate
rights assimilated to income from shares by the taxation laws
of the Contracting State of which the company making the
distribution is a resident.
xxx xxx xxx
The foregoing Article, however, was amended by
a Protocol which provides:
"ARTICLE III
Paragraph (2) of Article 10 of the Convention shall be
deleted and replaced by the following:
"(2) However, such dividends may also be taxed in the
Contracting State of which the company paying the dividends
is a resident, and according to the laws of that Contracting
State, but if the recipient is the beneficial owner of the
dividends the tax so charged shall not exceed:
(a) 10 per cent of the gross amount of
the dividends if the beneficial owner is a
company which holds directly at least 10 per
cent either of the voting shares of the company
paying the dividends or of the total shares
issued by that company during the period of six
months immediately preceding the date of
payment of the dividends;
(b) 15 per cent of the gross amount of
the dividends in all other cases.
The provisions of this paragraph shall not affect the
taxation of the company in respect of the profits out of which
the dividends are paid."
Pursuant to the foregoing, the 10 percent preferential tax rate
on dividends applies whenever the beneficial owner of the dividends
owns at least 10 percent either of the voting shares of the company
paying the dividends or of the total shares issued by the company
during the period of six months immediately preceding the date of
payment of the dividends. In all other cases, the 15 percent
preferential tax rate applies. Such being the case and considering
that Toshiba-Japan holds more than 10 percent of the capital
of Toshiba-Philippines during the period of six months immediately
preceding the date of payment of the dividends, this Office is of the
opinion and so holds that the dividend payments
by Toshiba-Philippines pertaining to Toshiba-Japan shall be subject
to the preferential tax rate of 10 percent of the gross amount of the
dividends pursuant to Article 10 (2) (a) of the Philippines-Japan tax
treaty. (BIR Ruling No. ITAD-087-83 dated May 17, 1983; BIR Ruling
No. ITAD-008-99 dated July 20, 1999; ITAD Ruling No. 020-99 dated
August 18, 1999; BIR Ruling No. DA-ITAD-041-99 dated November 3,
1999; BIR Ruling No. DA-ITAD 047-99 dated December 9, 1999)
As regards the imposition of the VAT on the transfer of
technical know-how of Toshiba-Japan, please be informed further
that Section 108 of the Tax Code of 1997 2 provides as follows:
(Emphasis supplied)
xxx xxx xxx"
Thus, in general, the VAT is imposed on the transfer of
technical know-how by Toshiba-Japan in the Philippines, such that
on every payment of royalty fees, Toshiba-Philippines is generally
required to withhold such VAT and treat the same as a "passed
on" VAT, pursuant to Section 4.110-3 (b) of Revenue Regulations No.
7-95 as amended [now Section 4.114-2 (b) of Revenue Regulations
No. 16-05].
Technology (Philippines) (G.R. No. 153866, February 11, 2005), the
Supreme Court held, viz.:
"Special laws may certainly exempt transactions from
the VAT. 4 However, the Tax Code provides that those falling
under PD 66 are not. PD 66 is the precursor of RA 7916 —
the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not
VAT-exempt. These are subject to the VAT; respondent is
required to register.
xxx xxx xxx
Since the purchases of respondent are not exempt
from the VAT, the rate to be applied is zero. Its exemption
under both PD 66 and RA 7916 effectively subjects such
transactions to a zero rate, because the ecozone within which
it is registered is managed and operated by the PEZA as a
separate customs territory. This means that in such zone is
created the legal fiction of foreign territory. Under
the cross-border principle of the VAT system being enforced
by the Bureau of Internal Revenue (BIR), no VAT shall be
imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the
Philippines to a foreign country are free of the VAT, then the
same rule holds for such exports from the national territory —
except specifically declared areas — to an ecozone.
xxx xxx xxx
Applying the special laws we have earlier discussed,
and regulations.
to distinguish.
rule.
prohibited directly, it is also prohibited indirectly.
xxx xxx xxx"
Based on the foregoing, transactions exempt from VAT by
reason of PD 66 and RA 7916 are effectively zero-rated. However,
instead of zero-rating which is not available to non-resident suppliers,
the provision for exempt transactions under Section 109 (q) [now
Section 109 (K)] of the Tax Code of 1997 which provides VAT
Such being the case, the payment of royalty fees
by Toshiba-Philippines, being a PEZA-registered enterprise,
to Toshiba-Japan under the Agreement should be, as it is hereby
confirmed to be, exempt from VAT.
This ruling is issued on the basis of the facts as represented
and shall only apply insofar as the royalty aspect is concerned.
Very truly yours,
(SGD.) JOEL L. TAN-TORRES

Footnotes
1."Contract Products" means hard disk drives, optical disk drives and
printed circuit boards for personal computers.
2.Please note that this cited provision has been retained by Republic Act
(RA) No. 9337, although with the modification as to the applicable
rate when the circumstances so warrant.
3.Effective February 1, 2006, the rate shall be 12%.
4.Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section
109 (K), as amended by RA No. 9337].
June 2, 2015
(Business Profits),
Philippines-Korea tax
treaty
Korea Exchange, Inc.

Beomil-dong, Nulwon Building
134 Jaesong-ro, Dong-gu
Busan, Korea
Attention: Mr. Jeong Seong Yeop

This refers to your tax treaty relief application filed on January
13, 2014 requesting that payments made by the Securities and
Exchange Commission ("SEC") to Korea Exchange, Inc. ("KRX") are
exempt from income tax pursuant to the Convention between the
with Respect to Taxes on Income ("Philippines-Korea tax treaty").
Facts
KRX is a foreign corporation and a resident of Korea based on
its amended Articles of Incorporation and Certificate of Business
Registration issued by the Busanjin District Tax Office on October 23,
2013. KRX is located at Beomil-dong, Nulwon Building, 134,
Jaseong-ro, Dong-gu, Busan, Korea. The company's primary
purpose is the operation and management of business related to
Korean Composite Stock Price Index Market, Korean Securities
Dealers Automated Quotations Market, and Derivatives Market;
businesses related to the trading of securities and exchange-traded
derivatives products; businesses related to the listing of securities;
businesses related to the auctioning of securities; and businesses
related to the development and operation of computer systems in
connection with the operation of the securities and derivatives
markets. It is not registered as a corporation or partnership in the
Philippines based on the Certificate of Non-Registration issued by the
Securities and Exchange Commission on September 23, 2013. On
the other hand, SEC is a government agency with a mission to
strengthen the corporate and capital market infrastructure of the
Philippines, and to maintain a regulatory system, based on
international best standards and practices, that promotes the
interests of investors in a free, fair and competitive business
environment. SEC is located at SEC Building, EDSA, Greenhills,
Mandaluyong City, Philippines.
On February 26, 2013, SEC and KRX entered into a Contract
for the Delivery, Testing and Commissioning of a
Packaged Software of a Market Surveillance System where the Bids
and Awards Committee of SEC awarded to KRX the bid to supply
services to SEC in the sum of 37,000,000 pesos. The contract has a
term of 12 months. Payment of the contract price is subject to the
following schedule:
a) Advance payment shall be made only after prior approval
and shall not exceed 15 percent of the price.
b) On contract signature, 10 percent of the price shall be paid
within 60 calendar days from signing and upon
submission of a claim and a bank guarantee.
c) On delivery, 70 percent of the price shall be paid within 60
days after the date of receipt of the goods and upon
submission of pertinent documents.
d) On acceptance, the remaining 20 percent of the price shall
be paid within 60 days after the date of submission of the
acceptance and inspection certificate.
e) All progress payments shall first be charged against the
advance payment until the latter has been fully
exhausted.
The project is divided into the following
milestones/deliverables:
1. Analysis and Design
— Systems Requirements Specification (10 percent of
contract price)
— Functional Specification Document (10 percent)
2. Hardware/Third Party Software Licenses Installation (15
percent)
3. User's Acceptance Test (5 percent)
4. Migration of Completed Application/Packaged with
Tailor-fitting Software (5 percent)
5. Conduct of Users/Technical and Administrator Training (10
percent)
6. Back-up/Restoration/Recoveries Facilities, Programs and
Scripts (10 percent)
7. Full Acceptance of the Project (20 percent)
The Packaged Software, excluding the Hardware, and Third
Party Software, is composed of software originally coded in Korea.
Minor analysis and system test activities are expected to be
performed in the Philippines, which constitute less than 10 percent of
the full Packaged Software.
Based on the Certification issued by the SEC Bids and Awards
Committee on April 6, 2015, KRX had sent its personnel to the
Philippines to deliver, test and commission the SEC Market
Surveillance System at SEC during the following period:
Augus Tota
April June October November December January
t l
2013 2013 2013 2013 2013 2013 2014
- - -
Integratio -Integratio
Analysi Analysi Desig - Test - User
n n
s s n
Acceptanc
Server Test Test
e
Installatio
- Users' Test
n
Training - Pilot
- User Operation
Acceptance
Test
15-19 5-7 12-16 16-18 18-30 1-6 1-17
9-13 20-31
16-31
85
5 3 5 3 13 27 29
days
<
The concerned personnel were Lee Seung Jun, Shin Hong Hee, II
Yong Kim, Choon Sik Kim, Seong Yeop Jeong, Gi Yong Park, Sang
Yole Lee, Seo Tai Sek and Bae Jung Woo.
Based on the certified copy of the Confirmation of Full
Acceptance of the Project issued by the SEC Bids and Award
Committee on May 27, 2014, the SEC Market Surveillance System
has been successfully completed by KRX as Project supplier to the
full satisfaction of SEC as Procuring Entity with the scope of work
performed within the 12-month period from February 26, 2013 to
February 25, 2014. Based on the email of KRX dated February 26,
2015, in line with the warranty requirement of the Contract of two
years in the case of the software package third
party software licenses and three years for equipment (servers,
storage and other related equipment supplied for the Project), KRX
has provided minor correction services after the issuance of the
Confirmation of Full Acceptance but such services were performed
remotely in Korea and none in the Philippines.
Based on the Certification issued by the Land Bank of the
Philippines 1 on December 19, 2013, SEC paid KRX an amount of
3,131,516.18 pesos on that date.
Ruling
income derived by a foreign corporation not engaged in trade or
business in the Philippines is subject to a general rate of 30 percent,
to wit:
Corporations. —
xxx xxx xxx
might be exempt (or partially) under a treaty obligation, thus:
xxx xxx xxx
xxx xxx xxx
In this particular case you invoke the Philippines-Korea tax
treaty. Paragraph 1, Article 7 thereof provides:
"Article 7
Business Profits
enterprise carries on business as aforesaid, the profits
of the enterprise may be taxed in the other State but
only so much of them as is attributable to that
permanent establishment."
Under Article 7, profits derived by an enterprise of Korea are
taxable only in Korea unless the enterprise carries on business in the
Philippines through a permanent establishment and the profits are
attributable to the permanent establishment. In relation to a
permanent establishment, this is defined in paragraphs 1, 2 and 3,
Article 5 of the treaty as follows:
"Article 5
carried on.
b) a branch;
c) an office;
d) a factory;
e) a workshop;
of extraction of natural resources;
g) premises used as a sales outlet; and
h) a warehouse, in relation to a person providing storage
facilities for others.
3. a) a building site or construction, installation or assembly
therewith, constitute a permanent establishment
only if such site, project or activity continues for a
period of more than six months;
b) the furnishing of services including consultancy services by
an enterprise through an employee or other
personnel constitutes a permanent establishment
only if activities of that nature continue within a
exceeding in the aggregate 183 days within any
twelve-month period; and"
partly carried on, and includes, especially, a place of management, a
branch, an office, a factory, and a workshop. A permanent
establishment also includes the furnishing of services including
consultancy services by an enterprise (through employees or other
personnel thereof) which continue within a Contracting State for an
aggregate period of 183 days within any 12-month period. HTcADC
Accordingly, since KRX is not engaged in trade or business in

the Philippines to which an office or a branch is necessary, and it
did not furnish services in the Philippines for more than an aggregate
of 183 days within any 12-month period, but for 85 days only, KRX
is not deemed to have a permanent establishment in the Philippines
under paragraphs 1, 2 and 3, Article 5 of the Philippines-Korea tax
treaty. This being the case, payments made to KRX by SEC for the
delivery, testing and commissioning of the SEC Market Surveillance
System are exempt from income tax pursuant to paragraph 1, Article
7 of the treaty.
On the characterization of the payments as business
profits (which are exempt from income tax if not attributable to a
permanent establishment) as against payments for
know-how or royalties (which are subject to reduced income tax), the
"11.1 In the know-how Contract, one of the parties agrees to
11.2 This type of Contract thus differs from Contracts for the
made under the latter Contracts generally fall under
Article 7.
— In the case of Contracts for the provision of services,
the other party.
Contract other than to supply existing information
a Contract for the performance of services would,
order to perform his Contractual obligations. For
sub-Contractors for the performance of similar
his Contractual obligations to the other party, such as salaries and
sub-Contractors for the performance of similar services.
Accordingly, since the Contract for the Delivery, Testing and
Commissioning of the SEC Market Surveillance System did not call
for KRX to supply existing information or reproduce existing material
to SEC, but to deliver a full packaged software to SEC, install it in the
latter's IT system, and test the software, this contract is clearly a
contract for the performance of services and not the supply of
a substantial number of personnel were required to implement the
project and they performed work in Korea and in the Philippines, KRX
certainly incurred a greater level of expenditure (such as salaries and
wages of personnel) to fulfil its contractual obligations to SEC. This
being the case, payments made to KRX for the project constitute
as business profits and not payments for know-how or royalties.
Finally, under Section 108 (A) in relation to Section 105 of
the Tax Code,payments made to KRX (although a nonresident
foreign person) for the delivery, installation and testing of
the software in the Philippines are subject to value-added tax ("VAT"),
to wit:
imposed in Sections 106 to 108 of this Code. . .
services as defined in this Code rendered in the Philippines
by nonresident foreign persons shall be considered as being
Relative thereto, SEC shall withhold VAT on the payments at
the rate of 12 percent before remitting them to KRX. SEC shall use
and Other Percentage Taxes Withheld). The duly filed form and
accompanying proof of payment shall serve as SEC's documentary
substantiation for its claim of input VAT on the payments; otherwise,
SEC may treat the VAT as an asset or expense, whichever is
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
1.Head office located at Land Bank Plaza, 1598 M.H. Del Pilar corner Dr. J.
Quintos Streets, Malate, Manila, Philippines.
3.Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005
(Consolidated Value-Added Tax Regulations of 2005), as
"SEC. 4.114.2. Withholding of VAT on Government Money Payments and
xxx xxx xxx
and
Withheld.
withholding agent.
||| (ITAD BIR Ruling No. 154-15, [June 2, 2015])June 2, 2015
(Business Profits),
treaty
Korea Exchange, Inc.

Beomil-dong, Nulwon Building
134 Jaesong-ro, Dong-gu
Busan, Korea
Attention: Mr. Jeong Seong Yeop

13, 2014 requesting that payments made by the Securities and
Exchange Commission ("SEC") to Korea Exchange, Inc. ("KRX") are
exempt from income tax pursuant to the Convention between the
with Respect to Taxes on Income ("Philippines-Korea tax treaty").
Facts
KRX is a foreign corporation and a resident of Korea based on
its amended Articles of Incorporation and Certificate of Business
Registration issued by the Busanjin District Tax Office on October 23,
2013. KRX is located at Beomil-dong, Nulwon Building, 134,
Jaseong-ro, Dong-gu, Busan, Korea. The company's primary
purpose is the operation and management of business related to
Korean Composite Stock Price Index Market, Korean Securities
Dealers Automated Quotations Market, and Derivatives Market;
businesses related to the trading of securities and exchange-traded
derivatives products; businesses related to the listing of securities;
businesses related to the auctioning of securities; and businesses
related to the development and operation of computer systems in
connection with the operation of the securities and derivatives
markets. It is not registered as a corporation or partnership in the
Philippines based on the Certificate of Non-Registration issued by the
Securities and Exchange Commission on September 23, 2013. On
the other hand, SEC is a government agency with a mission to
strengthen the corporate and capital market infrastructure of the
Philippines, and to maintain a regulatory system, based on
international best standards and practices, that promotes the
interests of investors in a free, fair and competitive business
environment. SEC is located at SEC Building, EDSA, Greenhills,
Mandaluyong City, Philippines.
On February 26, 2013, SEC and KRX entered into a Contract
for the Delivery, Testing and Commissioning of a
Packaged Software of a Market Surveillance System where the Bids
and Awards Committee of SEC awarded to KRX the bid to supply
services to SEC in the sum of 37,000,000 pesos. The contract has a
term of 12 months. Payment of the contract price is subject to the
following schedule:
a) Advance payment shall be made only after prior approval
and shall not exceed 15 percent of the price.
b) On contract signature, 10 percent of the price shall be paid
within 60 calendar days from signing and upon
submission of a claim and a bank guarantee.
c) On delivery, 70 percent of the price shall be paid within 60
days after the date of receipt of the goods and upon
submission of pertinent documents.
d) On acceptance, the remaining 20 percent of the price shall
be paid within 60 days after the date of submission of the
acceptance and inspection certificate.
e) All progress payments shall first be charged against the
advance payment until the latter has been fully
exhausted.
The project is divided into the following
milestones/deliverables:
1. Analysis and Design
— Systems Requirements Specification (10 percent of
contract price)
— Functional Specification Document (10 percent)
2. Hardware/Third Party Software Licenses Installation (15
percent)
3. User's Acceptance Test (5 percent)
4. Migration of Completed Application/Packaged with
Tailor-fitting Software (5 percent)
5. Conduct of Users/Technical and Administrator Training (10
percent)
6. Back-up/Restoration/Recoveries Facilities, Programs and
Scripts (10 percent)
7. Full Acceptance of the Project (20 percent)
The Packaged Software, excluding the Hardware, and Third
Party Software, is composed of software originally coded in Korea.
Minor analysis and system test activities are expected to be
performed in the Philippines, which constitute less than 10 percent of
the full Packaged Software.
Based on the Certification issued by the SEC Bids and Awards
Committee on April 6, 2015, KRX had sent its personnel to the
Philippines to deliver, test and commission the SEC Market
Surveillance System at SEC during the following period:
Augus Tota
April June October November December January
t l
2013 2013 2013 2013 2013 2013 2014
- - -
Integratio -Integratio
Analysi Analysi Desig - Test - User
n n
s s n
Acceptanc
Server Test Test
e
Installatio
- Users' Test
n
Training - Pilot
- User Operation
Acceptance
Test
15-19 5-7 12-16 16-18 18-30 1-6 1-17
9-13 20-31
16-31
85
5 3 5 3 13 27 29
days
<
The concerned personnel were Lee Seung Jun, Shin Hong Hee, II
Yong Kim, Choon Sik Kim, Seong Yeop Jeong, Gi Yong Park, Sang
Yole Lee, Seo Tai Sek and Bae Jung Woo.
Based on the certified copy of the Confirmation of Full
Acceptance of the Project issued by the SEC Bids and Award
Committee on May 27, 2014, the SEC Market Surveillance System
has been successfully completed by KRX as Project supplier to the
full satisfaction of SEC as Procuring Entity with the scope of work
performed within the 12-month period from February 26, 2013 to
February 25, 2014. Based on the email of KRX dated February 26,
2015, in line with the warranty requirement of the Contract of two
years in the case of the software package third
party software licenses and three years for equipment (servers,
storage and other related equipment supplied for the Project), KRX
has provided minor correction services after the issuance of the
Confirmation of Full Acceptance but such services were performed
remotely in Korea and none in the Philippines.
Based on the Certification issued by the Land Bank of the
Philippines 1 on December 19, 2013, SEC paid KRX an amount of
3,131,516.18 pesos on that date.
Ruling
income derived by a foreign corporation not engaged in trade or
business in the Philippines is subject to a general rate of 30 percent,
to wit:
Corporations. —
xxx xxx xxx
might be exempt (or partially) under a treaty obligation, thus:
xxx xxx xxx
xxx xxx xxx
In this particular case you invoke the Philippines-Korea tax
treaty. Paragraph 1, Article 7 thereof provides:
"Article 7
Business Profits
enterprise carries on business as aforesaid, the profits
of the enterprise may be taxed in the other State but
only so much of them as is attributable to that
permanent establishment."
Under Article 7, profits derived by an enterprise of Korea are
taxable only in Korea unless the enterprise carries on business in the
Philippines through a permanent establishment and the profits are
attributable to the permanent establishment. In relation to a
permanent establishment, this is defined in paragraphs 1, 2 and 3,
Article 5 of the treaty as follows:
"Article 5
carried on.
b) a branch;
c) an office;
d) a factory;
e) a workshop;
g) premises used as a sales outlet; and
h) a warehouse, in relation to a person providing storage
facilities for others.
3. a) a building site or construction, installation or assembly
therewith, constitute a permanent establishment
only if such site, project or activity continues for a
period of more than six months;
b) the furnishing of services including consultancy services by
an enterprise through an employee or other
personnel constitutes a permanent establishment
only if activities of that nature continue within a
twelve-month period; and"
branch, an office, a factory, and a workshop. A permanent
establishment also includes the furnishing of services including
consultancy services by an enterprise (through employees or other
personnel thereof) which continue within a Contracting State for an
aggregate period of 183 days within any 12-month period. HTcADC
Accordingly, since KRX is not engaged in trade or business in

the Philippines to which an office or a branch is necessary, and it
did not furnish services in the Philippines for more than an aggregate
of 183 days within any 12-month period, but for 85 days only, KRX
is not deemed to have a permanent establishment in the Philippines
under paragraphs 1, 2 and 3, Article 5 of the Philippines-Korea tax
treaty. This being the case, payments made to KRX by SEC for the
delivery, testing and commissioning of the SEC Market Surveillance
System are exempt from income tax pursuant to paragraph 1, Article
7 of the treaty.
On the characterization of the payments as business
profits (which are exempt from income tax if not attributable to a
permanent establishment) as against payments for
know-how or royalties (which are subject to reduced income tax), the
"11.1 In the know-how Contract, one of the parties agrees to
11.2 This type of Contract thus differs from Contracts for the
made under the latter Contracts generally fall under
Article 7.
— In the case of Contracts for the provision of services,
the other party.
Contract other than to supply existing information
a Contract for the performance of services would,
order to perform his Contractual obligations. For
sub-Contractors for the performance of similar
his Contractual obligations to the other party, such as salaries and
sub-Contractors for the performance of similar services.
Accordingly, since the Contract for the Delivery, Testing and
Commissioning of the SEC Market Surveillance System did not call
for KRX to supply existing information or reproduce existing material
to SEC, but to deliver a full packaged software to SEC, install it in the
latter's IT system, and test the software, this contract is clearly a
contract for the performance of services and not the supply of
a substantial number of personnel were required to implement the
project and they performed work in Korea and in the Philippines, KRX
certainly incurred a greater level of expenditure (such as salaries and
wages of personnel) to fulfil its contractual obligations to SEC. This
being the case, payments made to KRX for the project constitute
as business profits and not payments for know-how or royalties.
Finally, under Section 108 (A) in relation to Section 105 of
the Tax Code,payments made to KRX (although a nonresident
foreign person) for the delivery, installation and testing of
the software in the Philippines are subject to value-added tax ("VAT"),
to wit:
imposed in Sections 106 to 108 of this Code. . .
Relative thereto, SEC shall withhold VAT on the payments at
the rate of 12 percent before remitting them to KRX. SEC shall use
and Other Percentage Taxes Withheld). The duly filed form and
accompanying proof of payment shall serve as SEC's documentary
substantiation for its claim of input VAT on the payments; otherwise,
SEC may treat the VAT as an asset or expense, whichever is
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
1.Head office located at Land Bank Plaza, 1598 M.H. Del Pilar corner Dr. J.
Quintos Streets, Malate, Manila, Philippines.
3.Pursuant to Section 4.112-2 of Revenue Regulations No. 16-2005
(Consolidated Value-Added Tax Regulations of 2005), as
"SEC. 4.114.2. Withholding of VAT on Government Money Payments and
xxx xxx xxx
and
Withheld.
withholding agent.
November 6, 2013
Article
12, Philippines-Netherland
s Tax Treaty
SyCip Gorres Velayo & Co.

6760 Ayala Avenue,
1226 Makati City,
Philippines
Attention: Ms. Lucil Q. Vicerra

Principal, Tax and Customs Services
Gentlemen :

on August 15, 2012, on behalf of Nike European Operations
Netherlands B.V. ("Nike-Netherlands") requesting confirmation that
the royalty payments made by Nike Philippines, Inc.
("Nike-Philippines") to Nike-Netherlands are subject to 15 percent
pursuant to Article 12 of the Philippines-Netherlands tax treaty. 1
TAIEcS
It is represented that Nike-Netherlands, with office address at

Colosseum 1, 1213 NL Hilversum, The Netherlands, is a resident of
The Netherlands within the meaning of the Philippines-Netherlands
tax treaty, based on the Declaration of Residence issued by the
Director-General of the Tax and Customs Administration of The
Netherlands; that Nike-Netherlands is not registered either as a
corporation or as a partnership in the Philippines based on the
and Exchange Commission on June 29, 2012; on the other
hand, Nike-Philippines is a corporation organized and existing under
the laws of the Philippines with business address at 10th Floor
Marajo Tower, 312 26th Street, West corner 4th Avenue, Bonifacio
Global City, 1463, Taguig City.
It is further represented
that Nike-Philippines and Nike-Netherlands entered into
an Intellectual Property License Demand Creation and Retail Sale
Agreement ("Creation Agreement") effective as of August 1, 2012
and ends on May 31, 2013 and shall be automatically renewed for an
additional one-year term unless either party gives written notice to the
other of an intent to terminate; that pursuant to and subject to the
condition set in the Creation Agreement, Nike-Netherlands grants
to Nike-Philippines the following:
a) A non-transferable and exclusive license to use the
Licensed Technology 2 and the Licensed Works of
Authorship 3 and all associated Intellectual Property
Rights in the Licensed Territory 4 to create
consumer demand for, and to sell to end consumers
through physical locations and on-line channels in
the Licensed Territory, Footwear, Apparel,
Equipment and Accessories bearing the Licensed
Trademarks; and
b) A non-transferable and exclusive license to use
Licensed Trademarks 5 and all associated
Intellectual Property Rights 6 in the Licensed
Territory to create consumer demand for, and to sell
to end consumers through physical locations and
on-line channels in the Licensed Territory, Footwear,
Apparel, Equipment and Accessories bearing the
Licensed Trademarks.
That in consideration for the rights granted under the Creation
Agreement, Nike-Netherlands shall pay Nike-Philippines a royalty for
each Creation Agreement Month 7 equivalent to 8.75% of
the Nike-Philippines' Net Sales for the Creation Agreement Month
immediately preceding the Creation Agreement Month to which
the royalty applies.
Moreover, it is also represented that on August 1, 2012
an Intellectual Property License — Product Manufacturing and
Wholesale Distribution Agreement ("Product Agreement") was also
entered into by and
between Nike-Netherlands and Nike-Philippines to take effect until
May 31, 2013 and shall automatically renew for an additional
one-year term unless either party gives written notice of an intent to
terminate; that pursuant to the Product
Agreement, Nike-Netherlands grants Nike-Philippines:
1. A non-transferable, non-exclusive worldwide license to
use the Licensed Technology 8 the Licensed Works
of Authorship 9 and all associated Intellectual
Property Rights 10 to manufacture or have
manufactured Licensed Products 11 bearing the
Licensed Trademarks, provided that all such
Licensed Products are sold by Nike-Philippines only
in the Licensed Territory in accordance with the
Product Agreement; and cCTaSH
2. A non-transferable and exclusive license to sell to

retailers, distributors or other resellers in the
Licensed Territory Licensed Products bearing the
Licensed Trademarks.
That in consideration for Nike-Netherlands' grant of the right to sell
Licensed Products in the Licensed Territory, Nike-Philippines agrees
to pay Nike-Netherlands a royalty equal to 3.75% of Nike-Philippines'
Net Wholesale Sales Revenues 12 for each Creation Agreement
Month 13 during the Agreement Term; and that based on sworn
certification dated October 16, 2012 issued
by Nike-Philippines that royalty payments were remitted
to Nike-Netherlands on September 19, 2012.
Finally, it is also represented that the issue or transaction
subject of the above request for ruling is not under investigation
neither is it subject of an on-going audit, administrative protest, claim
proceedings nor a judicial appeal of the taxpayers involved per Sworn
Statement issued by Nike-Philippines on June 29, 2012.
amended, applies in general. It provides:
Corporations. —
xxx xxx xxx
Code, a foreign corporation not engaged in trade or business in
the Philippines shall pay a tax equal to thirty-five percent (35%)
of the gross income received during each taxable year from all
sources within the Philippines, such as . . ., royalties, . . .:
Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%).
xxx xxx xxx"
amended provides:
xxx xxx xxx
exempt from taxation under this Title: TSacID
xxx xxx xxx

to the extent required by any treaty obligation binding
upon the Government of the Philippines.
xxx xxx xxx"
In this particular case, Article 12 of the Philippines-Netherlands
tax treaty may apply. It provides, as follows:
"Article 12
Royalties
1. Royalties arising in one of the States and paid to a resident
of the other State may be taxed in that other State.
2. However, such royalties may also be taxed in the 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) 10 per cent of the gross amount of the royalties where
the royalties are paid by an enterprise registered,
and engaged in preferred areas of activities in
that State; and
other cases.
xxx xxx xxx
scientific work including cinematograph films or tapes for
radio or television broadcasting, any patent, trademark,
industrial, commercial or scientific experience.
xxx xxx xxx"
Based on the above-mentioned provisions, royalty payments
will be taxed at a preferential rate of 10 percent if the payor is an
enterprise registered and engaged in preferred areas of activities in
the Philippines, or 15 percent of the gross amount of the royalties in
all other cases.ISCaDH
Considering that Nike-Philippines is not a Board of Investments

(BOI)-registered enterprise engaged in preferred areas of activities in
the Philippines, this Office is of the opinion and so holds that
the royalty payments made
by Nike-Philippines to Nike-Netherlands under the Creation
Agreement and Product Agreement are subject to the preferential tax
rate of 15 percent of the gross amount of royalties pursuant to Article
12 (2) (b) of the Philippines-Netherlands tax treaty.
Moreover, as provided in Section 108 of the Tax Code of 1997,
as amended, the said royalty payments are subject to value-added
tax (VAT), thus:
services, including the use or lease of properties:
xxx xxx xxx
(3) The supply of scientific, technical, industrial or
commercial knowledge or information;
xxx xxx xxx"
Accordingly, Nike-Philippines, being the resident withholding
agent and payor in control of the payment, shall be responsible for
the withholding of the 12% final VAT on such royalty before making
any payment to Nike-Netherlands. In remitting the VAT
withheld, Nike-Philippines shall use BIR Form No. 1600 (Monthly
input tax by Nike-Philippines upon filing its own VAT return, if it is a
VAT-registered taxpayer. In case Nike-Philippines is a non-VAT
an "expense" or as an "asset", whichever is applicable. In
addition, Nike-Philippines is required to issue the Certificate of Final
quadruplicate, the first three copies thereof to be given
to Nike-Netherlands upon its request and the fourth copy to be
retained by Nike-Philippines as its file copy. [Section 4.110.3
(b), Revenue Regulations No. (RR) 7-95, as amended by RR
08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07);
Section 4.114 (d), as amended by RR 28-03]
insofar as the herein parties are concerned. aIHSEc
Very truly yours,

(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Convention between the Kingdom of the Netherlands and the Republic of
the Philippines for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income.
2."Licensed Technology" means any invention, idea, development, design,
specification, concept, process, method, algorithm, formula, technique,
know-how or other discovery, whether or not patented or patentable,
that (i) Licensor owns or has licensed from a third party or creates,
develops, acquires or licenses in the future, and (ii) relates to or is
useful in connection with creating demand for or retail sale of
Footwear, Apparel, Equipment or Accessories bearing the Licensed
Trademarks. Licensed Technology includes, without limitations,
inventions and design concepts relating to retail store
layouts, software programming concepts and configurations relating
to in-store kiosks or on-line presentation of product images or
information, and confidential business methods relating to consumer
online "mass customization" of Footwear, Apparel, Equipment or
Accessories.
3."Licensed Work(s) of Authorship" means all Work of Authorship that (i) that
are owned by Licensor in the Licensed Territory and/or licensed to
Licensor for use in the Licensed Territory and (ii) related to or are
useful in connection with creating demand for or retail sale of
Footwear, Apparel, Equipment or Accessories bearing the Licensed
Trademarks, including any such Works of Authorship acquired,
created or licensed by Licensor after the date of this Agreement.
Licensed Works of Authorship include, without limitations, advertising
copy and graphic content for Licensor's global or regional advertising
campaigns, graphics for in-store or on-line product displays, images of
athletes, teams and coaches who endorsee Footwear, Apparel,
Equipment or Accessories bearing the Licensed Trademarks, images
of fictional characters and avatars, software programs relating to
demand creation or retail sales, musical composition and sound
recording intended for in-store or on-line retail environments and any
written materials relating to market studies, demand creation plans, or
the like.
4."Licensed Territory" means those countries, territories and regions of the
world listed on Exhibit A.
5."Licensed Trademarks" means: (a) all trademarks that are owned by or
licensed to Licensor for use in the Licensed Territory (other than the
trademarks associated with the Manschester United Football Club and
Confederacao Brasileira de Futebol which are the subject of a
separate agreement) and are either (i) associated with the NIKE,
NIKE Golf, SPARQ or Jordan brands, including but not limited to the
NIKE name, the Swoosh design, the composite Nike/Swoosh design,
the NIKE Golf Logo, the SPARQ name, and the Jumpman design, or
(ii) approved by the Licensor or its licensors for use in the Licensed
Territory; and (b) any other trademarks described in (a) (i) or (ii) above
that are acquired, created or licensed by Licensor after the date of this
Agreement.
6."Intellectual Property Rights" means all intellectual property rights
commonly referred to as such under applicable law, including without
limitation patent rights associated with methods of demand creation or
retail sale, copyrights, moral rights, trademark rights, trade name
rights, service mark rights, trade dress rights, trade secret rights,
proprietary rights, privacy rights, and publicity rights, whether or not
those rights have been filed for or registered under any statute, rule,
regulation or other laws.
7."Agreement Month" means the period commencing on the Effective Date
and ending on August 31, 2012, and each succeeding one-month
period thereafter during the Agreement Term.
8."Licensed Technology" means any invention, idea, development, design,
pattern, specification, prototype, concept, process, method, algorithm,
formula, technique, know-how or other discovery, whether or not
patented or patentable, that (i) Licensor owns or has licensed from a
third party, or creates, develops acquires or licenses in the future, and
(ii) relates to or is useful in connection with the manufacture of
Licensed Products.
9."Licensed Work(s) of Authorship" means all Work of Authorship that (i) that
are owned by Licensor in the Licensed Territory and/or licensed to
Licensor for use in the Licensed Territory and (ii) related to or are
useful in connection with the manufacture of Licensed Products,
including without limitation tech packages, graphic product designs,
technical specifications, bills of materials, supplier lists, process or
workflow diagrams, costing templates, and product images, and any
other such Works of Authorship acquired, created or licensed by
Licensor after the date or this Agreement.
10."Intellectual Property Rights" means all intellectual property rights
commonly referred to as such under applicable law, including without
limitation patent rights, copyrights, moral rights, trademark rights,
trade name rights, service mark rights, trade dress rights, trade secret
rights, privacy rights, and publicity rights, whether or not those rights
have been filed for or registered under any statute, rule regulation or
other law.
11."Licensed Products" means (i) Accessories, (ii) Apparel, (iii) Equipment,
(iv) Footwear, and (v) Other Products.
12."New Wholesales Sales Revenues" means the gross sales price
Licensee actually invoices a retailer, distributor or other reseller
(including a Licensee affiliate engaged in retail sales to consumers)
for Licensed Products, less all trade discounts, cash discounts,
chargebacks or merchandise return credits or allowances relating to
Licensed Products, and less all freight, insurance, duties, taxes and
packaging and distribution charges if separately stated in the
invoice; provided, however, that in the case of deliveries of Licensed
Products for no money consideration (e.g., for charitable or
promotional purposes) the New Wholesale Sales Revenues shall be
deemed to be zero.
13."Agreement Month" means the period commencing on the Effective Date
and ending on August 31, 2012, and each succeeding one-month
period thereafter during the Agreement Term.
March 4, 2016
Articles 13 &
States tax treaty
Level Up! Inc.

11th Floor, Pacific Star Building Makati Avenue
corner Sen. Gil Puyat Avenue, Makati City
Attention: Michael Dennis D. Rayala
Gentlemen :
This refers to your application for tax treaty relief filed on

August 24, 2012 requesting confirmation that the royalty fees to be
paid by Level Up! Inc. ("Level Up!") to Index Digital Media, Inc.
("IDMI") are subject to the preferential rate of 15 percent pursuant to
the Convention between the Government of the Republic of the
Respect to Taxes on Income ("Philippines-US tax treaty").
Basic Representations
It is represented that IDMI, formerly Atlus USA, Inc., is a US
corporation, and a resident of the United States of America (USA) for
purposes of U.S. taxation, as evidenced by a Certificate dated
February 6, 2012 issued by the Department of Treasury, Internal
Revenue Service of USA; that IDMI is situated 6400 Oak Canyon,
Suite 100, Irvine, California; that IDMI is not registered either as a
corporation or as a partnership in the Philippines per certification
issued by the Securities and Exchange Commission dated January
17, 2012; that, on the other hand, Level Up! is a domestic corporation
with principal address at the 8th Floor, Pacific Star Building, Makati
Avenue, Makati City; and that Level Up! is registered with the Board
of Investments, with a pioneer status, under Certificate of
Registration No. 2003-007 issued on January 20, 2003, as a "new IT
Service Firm in the field of Application Service Provider.
It is further represented that on March 28, 2012, IDMI
and Level Up! entered into a Philippines Payment Gateway
Marketing and Distributorship Agreement ("Agreement") whereby
IDMI appointed Level Up! as its exclusive territory partner of Pandora
Saga in the Philippines and non-exclusive territory partner of Knights
of the Sky and BattleSpace in the Philippines and grants to Level
Up! the sole, exclusive, non-assignable and indivisible right, license
and authorization to market and promote Pandora Saga to market,
promote and distribute the Client Software to end users and to
market, promote, distribute and sell ePINS redeemable for the credits
to end users in the territory pursuant to the terms of the Agreement;
that for and in consideration of the license, Level Up! shall pay IDMI
a royalty fee at the following percentages:
Game Revenue Share
Pandora Saga 55% of contribution margin

Knights of the Sky70% of Net Revenue
BattleSpace 70% of Net Revenue
that accordingly, the first payment was made on August 29, 2012
based on the Certification issued by the treasurer of Level
Up! together with an attached telegraphic transfer issued on even
date.
proceedings, or a judicial appeal based on the Sworn Statement
issued by Level Up! on July 12, 2012. TAIaHE
In reply, please be informed that income derived by

nonresident foreign corporations in the Philippines shall be subject to
income tax at the rate of 30 percent under Section 28 (B) (1) of
amended, to wit:
"Sec. 28. Rates of Income Tax on Foreign
Corporations. —
xxx xxx xxx
all sources within the Philippines, such as . . .,
royalties, . . .: Provided, That effective January 1,
percent (30%).
xxx xxx xxx"
However, such income may be exempt or subject to a reduced
rate pursuant to Section 32 (B) (5) of the same Code provides:
"Sec. 32. Gross Income. —
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
With respect to a treaty, you invoke Article 13, specifically
paragraph (2)(b)(ii), of the Philippines-USA tax treaty, which
provides:
"Article 13
Royalties
where the royalties are paid by a corporation
registered with the Philippine Board of
Investments and engaged in preferred areas of
activities, and
xxx xxx xxx" (underscoring supplied)
According to paragraph 2(b) above, royalties arising in the
Philippines and derived by a resident of the United States are subject
to (a) 25 percent of the gross amount of the royalties for royalties in
general, (b) 15 percent of the gross amount of the royalties if they are
paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities, and (c) 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.
In this case, since Level Up! is registered with the Philippine
Board of Investments and engaged in preferred areas of activities
based on the relevant Certification, this Office is of the opinion and so
holds that the license fees to paid by Level Up! to IDMI under
the Agreement are subject to 15 percent income tax rate based on
the gross amount thereof, under Article 13 (2) (b) (ii) of
the Philippines-USA tax treaty. cDHAES
Moreover, the said royalty payments by Level Up! to IDMI

being payments for the lease or the use of or the right or privilege to
use any copyright, patent, design or model, plan, secret formula or
process, shall be subject to the 12% value-added tax (VAT) under
Section 108 of the Tax Code of 1997, as amended.
Accordingly, Level Up!, being the resident withholding agent and
withholding of the 12% final VAT on such royalty before making any
payment to IDMI. In remitting the VAT withheld, Level Up! shall use
and Other Percentage Taxes Withheld). The duly filed BIR Form No.
1600 and proof of payment thereof shall serve as documentary
substantiation for the claim of input tax by Level Up! upon filing its
own VAT return, if it is a VAT-registered taxpayer. In case Level
Up! is a non-VAT registered taxpayer, the passed-on VAT withheld
shall form part of the cost of goods or properties purchased which
may be treated as an "expense" or as an "asset", whichever is
applicable. In addition, Level Up! is required to issue the Certificate of
Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate,
the first three copies thereof to be given to IDMI upon its request and
the fourth copy to be retained by Level Up! as its file copy. [Section
4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR
08-02 (now Section 4.114-2, RR 16-05); Section 4.114 (d), as last
amended by RR 28-03]
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
December 6, 2013
Article
relation to Section 32 (B) (5)
of the Tax Code of 1997, as
amended
Futaba Corporation of the Philippines

120 North Science Avenue, Laguna Technopark
SEPZ, Biñan, Laguna
Attention: Mr. Hiroshi Sekigawa

President
Gentlemen :

31, 2013 requesting confirmation that the royalty payments made
to Futaba Corporation-Japan ("Futaba Japan") by Futaba
Corporation of the Philippines ("Futaba Phil") are subject to
preferential tax rate of 10 percent pursuant to the Convention
between the Republic of the Philippines and Japan for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income as amended by
a Protocol 1("Philippines-Japan tax treaty"). aDIHTE
It is represented that Futaba Japan is a resident of Japan with

address at 629 Oshiba, Mobara, Chiba, Japan, based on the
Certificate of Residence dated July 6, 2012, issued by the District
Director of Mobara Tax Office, Noboru Ueno, Japan; that Futaba
Japan is not registered as a corporation or as a partnership in the
Philippines based on the Certification of Non-Registration of
Company issued by the Securities and Exchange Commission dated
October 10, 2012; that on the other hand, Futaba Phil is a domestic
corporation with address at 120 North Science Avenue, Laguna
Technopark SEPZ, Biñan, Laguna; and that Futaba Phil is registered
with the Philippine Economic Zone Authority (PEZA) under
Certification No. 2013-0181 based on the Certification issued by
PEZA on December 20, 2012.
It is further represented that on July 1, 2006, Futaba
Japan and Futaba Phil entered into a Technical Assistance and
License Agreement ("Agreement") whereby Futaba
Japan granted Futaba Phil the following: (1) a non-exclusive license
to manufacture the Products using the Manufacturing Technology
and Patents; and, (2) a non-exclusive license to sell the Products
which were manufactured using the Manufacturing Technology and
Patents with the Trademarks; that Futaba Japan shall provide Futaba
Phil with the Manufacturing Technology to the extent that Futaba
Phil needs to manufacture the Products; that for and in consideration
of the foregoing, Futaba Phil shall pay Futaba Japan
(1) a Patents Royalty of two percent of the net sales of products sold
by Futaba Phil and, (2) a Trademarks Royalty of one percent of the
sales of products sold by Futaba Phil; that the total royalties is three
percent of the sales of products sold by Futaba Phil; that in order to
receive the Manufacturing Technology, Futaba Japan shall enter into
a separate individual agreements with Futaba Phil in order to
dispatch engineers; that the scope of the services shall be as follows:
a) Technical assistance during the factory construction
such as determination, manufacturing, transfer,
launch, repair or modification of factory layout,
manufacturing equipment, utility facility, and
specification of dies, negotiation with manufacturing
corporations, various meetings and on-site
presence, etc.;
b) Lay-out of manufacturing premise, recovery,
adjustment and trial run of equipment, guidance on
manufacturing technology, guidance on factory
work, and training of workforce during the transfer of
new technology, new process, or new products;
c) Guidance regarding the designing and making
specifications for Products;
d) Assistance regarding the quality system, production
management system and information management
system;
e) Services regarding the maintenance of
equipment, software and systems;
f) Settlement of troubles in factory administration,
manufacturing process, quality, or yield ratio which
are not attributable to Futaba Japan;
g) Settlement of troubles in equipment and software which
are not attributable to Futaba Japan; and,
h) Human resource development of Futaba Phil or
instruction or training on know-how which Futaba
Japan has disclosed. HCEcaT
That Futaba Phil shall pay Futaba Japan the royalty fees within
30 days after the submission of the report of the Net Sales; Futaba
Phil shall make the payment in US Dollars based on the exchange
rate prevailing on the last day of the preceding month of the payment;
that Futaba Phil remitted royalty fees to Futaba Japan on May 23,
2013 based on the Certificate of Remittance issued by Bank of
Tokyo-Mitsubishi UFJ on June 3, 2013.
In reply, please be informed that Section 14 of Revenue
Memorandum Order No. (RMO) 72-2010 2 which took effect on
November 4, 2010, provides that:
0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C)
improperly filed.
the TTRA under this RMO." (emphasis supplied)
Relative thereto, Section 13 (4) of the same RMO defines the
first taxable event for purposes of filing the TTRA, to wit:
"SEC. 13. Definitions. —
xxx xxx xxx
4. First taxable event for purposes of filing the Tax
Treaty Relief Application (TTRA), shall mean the first or the
only time when the income payor is required to withhold the
income tax thereon or should have withheld taxes thereon had
the transaction been subjected to tax; and for 0901-C
applications, before the due date of the Documentary Stamp
Tax (DST) on the sale of the shares of stock." (emphasis
supplied)
In this case, the TTRA was filed only on January 31, 2013
covering the Agreement dated July 1, 2006. Thus, royalty payments
made on or before January 31, 2013, if any, shall be subject to 30
percent pursuant to Section 28 (B) (1) of the National Internal
Revenue Code of 1997 ("Tax Code"), as amended, which provides:
—...
aATESD
However, for royalty payments made on February 1, 2013 and

thereafter, such royalties may be exempt or subject to a reduced rate
to the extent required by any treaty obligation on the Philippines.
Section 32 (B) (5) of the Code provides:
xxx xxx xxx
Thus, you invoke the Philippines-Japan tax treaty.
With respect to royalties, Paragraphs 1, 2, 3 and 4, Article 12
thereof provide:
"Article 12
royalties if the royalties are paid in respect of
the use of or the right to use cinematograph
broadcasting;
experience. ETISAc
xxx xxx xxx"

— Contracts for the supply of
know-how concern information of that kind
described in paragraph 11 that already exists or
concern the supply of that type of information
after its development or creation and include
specific provisions concerning the
confidentiality of that information.
— In the case of contracts for the
provision of services, the supplier undertakes to
perform services which may require the use, by
that supplier, of special knowledge, skill and
expertise but not the transfer of such special
know-how, there would generally be very little
more which needs to be done by the supplier
under the contract other than to supply existing
information or reproduce existing material. On
the other hand, a contract for the performance
of services would, in the majority of
cases, involve a very much greater level of
expenditure by the supplier in order to perform
his contractual obligations. For instance, the
supplier, depending on the nature of the
services to be rendered, may have to incur
services. DHITcS
— payments obtained as consideration
for after-sales service,
— payments for services rendered by a
seller to the purchaser under a warranty,
— payments for pure technical
assistance,
— payments for a list of potential
customers, when such a list is developed
specifically for the payer out of generally
available information (a payment for the
confidential list of customers to which the payee
has provided a particular product or service
would, however, constitute a payment for
know-how as it would relate to the commercial
experience of the payee in dealing with these
customers),
— payments for an opinion given by an
engineer, an advocate or an accountant, and
— payments for advice provided
electronically, for electronic communications
with technicians or for accessing, through
computer networks, a trouble-shooting
database such as a database that provides
users of software with non-confidential
information in response to frequently asked
questions or common problems that arise
frequently." (Pages 225-226)
generally be very little more which needs to be done by Futaba
Japan under the contract other than to supply existing information or
level of expenditure by Futaba Japan in order to perform his
contractual obligations.
Under paragraphs 2 and 3 of Article 12 of
the Philippines-Japan tax treaty, royalties arising in the Philippines
and paid to a resident of Japan may be taxed in the Philippines at a
rate not to exceed (a) 15 percent of the gross amount of the royalties
if they are paid in respect of the use or the right to use of
broadcasting; (b) 10 per cent of the gross amount of the royalties in
all other cases; (c) 10 percent of the gross amount of the royalties if
they are paid by a domestic company registered with the Board of
Investments and engaged in preferred pioneer areas of investment
under the investment incentives laws of the Philippines.
Under paragraph 4 of Article 12, the term Royalties means
the right to use, any copyright of literary, artistic or scientific work
including cinematograph films and 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
("Know-how"). SaDICE
In this case, payments for the license to manufacture the

Products and license to sell the Products which were manufactured
using the Manufacturing Technology and Patents with the
Trademarks are treated as payments for information concerning
industrial, commercial or scientific experience. Thus, this Office is of
the opinion and so holds that royalty payments made by Futaba
PH to Futaba Japan on February 1, 2013 and thereafter shall be
treated as royalties subject to 10 percent of the gross amount thereof.
to Futaba Japan, please be informed further that Section 108 of
the Tax Code of 1997 provides as follows:
assessed and collected, a value-added tax equivalent to twelve
for a fee, . . . The phrase 'sale or exchange of services' shall
likewise include:
xxx xxx xxx
(2) The supply of scientific, technical or commercial
knowledge information;
xxx xxx xxx"
In this case, since Futaba PH is a PEZA-registered entity
availing of the Income Tax Holiday, payments made shall be subject
to 12 percent VAT under above-quoted provision. Futaba PH shall
withhold VAT at the rate of 12 percent on royalties payable to Futaba
Japan using BIR Form No. 1600. Futaba PH may use the VAT
withheld as input tax if it is a VAT-registered taxpayer, or may treat
the VAT as an expense or asset if Futaba PH is not a VAT-registered
taxpayer. Section 4.112-2 of Revenue Regulations No. 16-2005, 3 as
amended, provides:
"Withholding of VAT on Government Money Payments
and Payments to Non-Residents. —
xxx xxx xxx
(b) The government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, as well as
private corporation, individuals, estates and trust, whether
large or non-large taxpayers, shall withhold twelve percent
(12%) VAT, starting February 1, 2006, with respect to the
following payments:
(1) Lease or use of properties or property rights owned
by non-residents; and,
(2) Other services rendered in the Philippines by
non-residents.
In remitting VAT withheld, the withholding agent shall
use BIR Form No. 1600 — Remittance Return of VAT and
Other Percentage Taxes Withheld. AcICHD
VAT withheld and paid for the non-resident recipient

(remitted using BIR Form No. 1600), which VAT is passed on
to the resident withholding agent by the non-resident recipient
of the income, may be claimed as input tax by said
VAT-registered withholding agent upon filing his own VAT
Return, subject to the rule on allocation of input tax among
taxable sales, zero-rated sales and exempt sales. The duly
filed BIR Form No. 1600 is the proof or documentary
Nonetheless, if the resident withholding agent is a
non-VAT taxpayer, said passed-on VAT by the non-resident
recipient of the income, evidenced by the duly filed BIR Form
No. 1600, shall form part of the cost of purchased services,
which may be treated either as an 'expense' or 'asset',
whichever is applicable, of the resident withholding agent.
VAT withheld under this Section shall be remitted within
ten (10) days following the end of the month the withholding
was made."
Very truly yours,

(SGD.) KIM S.
JACINTO-HENARES
Footnotes
of Fiscal Evasion with Respect to Taxes on Income effective January
1, 2009.
2.Guidelines on the Processing Tax Treaty Relief Applications (TTRA)
Pursuant to Existing Philippine Tax Treaties.
3.Entitled, "Consolidated Value-Added Tax Regulations of 2005".
||| (ITAD BIR Ruling No. 339-13, [December 6, 2013])
July 1, 2010
Establishment), 7
(Business Profits),
and 12
(Royalties) Philippines-Net
herlands tax treaty
Isla Lipana & Co.

8767 Paseo de Roxas
1226 Makati City
Attention: Atty. Malou P. Lim

Gentlemen :
This refers to your letter dated December 19, 2008, filed on

behalf of your client, Silverlake (Netherlands) B.V.
(Silverlake), requesting confirmation of your opinion on the following,
with respect to the License Agreement entered into
by Silverlake and United Coconut Planters Bank (UCPB): ECcaDT
1. that payment made by UCPB to Silverlake pursuant to the

said License Agreement are classified as business
profits under Revenue Memorandum Circular No.
44-2005;
2. that Silverlake has no permanent establishment in the
Philippines, pursuant to Article 5 of
the Philippines-Netherlands tax treaty; and
3. that the subject payments are exempt from Philippine
income/withholding tax, pursuant to Article 7 (1) of
the Philippines-Netherlands tax treaty.
It is represented that Silverlake is a corporation organized and
existing under the laws of the Netherlands and is a resident of the
Netherlands within the meaning of Article 4 of the Convention for the
avoidance of double taxation between the Netherlands and the
Republic of the Philippines, with address at Strawinskylaan 3105,
1077 ZX Amsterdam based on the Declaration of Residence dated
January 21, 2009, issued by M. de Graaff, the Inspector of the Tax
Administration, Rotterdam, the Netherlands; that Silverlake is not
based on the Certification of Non-Registration of
Corporation/Partnership dated November 18, 2008, issued by the
Securities and Exchange Commission; and that, on the other hand,
UCPB is a corporation organized and existing under the laws of the
Philippines, situated at UCPB Building, Makati Avenue, Makati City,
Philippines.
It is further represented that on April 30, 2008, UCPB
and Silverlake entered into a License Agreement
wherein Silverlake granted UCPB (including the latter's
subsidiary, UCPB Savings Bank, UCPB Leasing and UCPB
Securities) a nonexclusive, nontransferable, and perpetual license to
use the Core Banking System Software Package (or the
Product); 1 and that the Product shall be used by UCPB at the
Site 2 for their internal processing requirements in the Philippines
only.
It is further represented that the Product is developed and
owned by and is a proprietary product of Silverlake and/or its
suppliers; that the License Agreement deals only with the licensed
use of the Product and not the transfer of ownership or other rights in
or to the Product; that the Product, whether written or in machine
readable form, including programs, diskettes, tapes, listings and
documentation, had originated with and was prepared
by Silverlake and/or its suppliers jointly and pursuant to the
Functional Specifications Document, and that any extension,
modification, derivative, customizations, or enhancements made
by Silverlake on the Product will continue to belong
to Silverlake and/or its suppliers; that UCPB will neither permit nor
cause any third party to translate, adapt, vary, modify, disassemble,
decompile, or reverse engineer the Product in whole or in part, except
to the extent permitted under applicable laws granting such rights to
UCPB as a lawful user of the Product and to the extent permitted
under the Agreement; that UCPB will supervise and control the use of
the Product in accordance with the terms of the Agreement and will
reproduce and include the copyright notice of Silverlake and/or its
suppliers on all copies of the Product including partial copies or
modifications thereof; that UCPB will, within 14 calendar days after
the termination of the Agreement and as instructed by Silverlake in
writing, return or destroy all electronic copies and printed documents
of the Product including all updates, upgrades and modifications of
the Product and all documentation relating thereto, and that UCPB
will give a written notice to Silverlake that it has complied with such
instruction of Silverlake; and that notwithstanding the foregoing,
UCPB may, with the prior written authorization of Silverlake, retain
one copy of the Product for archive purposes only or for other
purposes authorized by Silverlake under certain conditions imposed
on the continued retention of the Product; and that a copy of the
Source Code of the Product, as well as all its upgrades and
documentation may be accessed by UCPB through an escrow
arrangement with UCPB's Trust Banking Division as the escrow
agent, unless another Escrow Agent is mutually agreed upon
between the parties and the corresponding escrow fees shall be
shouldered entirely by UCPB unless another Escrow Agent is
appointed per mutual agreement in which case the escrow fees to be
charged shall be shared equally by UCPB and Silverlake.
It is further represented that in consideration for the use of the
Product, UCPB will pay Silverlake a license fee of US$3,156,900.00,
in accordance with the following schedule: TcHEaI
Percentage
Milestones Description
of
Contract Price
Payable
First Upon confirmation to commence 25 percent
Phase D pursuant to the Services
Agreement
Second Upon commencement of User 25 percent
Acceptance Testing by UCPB
Third Upon completion of User Acceptance 20 percent
Testing and sign-off of User
Acceptance Testing by UCPB
Fourth Upon Cut-Over Date 20 percent
Fifth Upon expiry of the Warranty Period 3 10 percent
that all payments to be made under the License Agreement will be

paid within 30 days from the payment due date, and that payments
not made within that period will accrue interest at the rate of twelve
percent (12%) per annum computed from the due date to the actual
date such payments are made; and that the issue/s or transaction
subject of the above request for ruling is not under investigation
neither is it subject of an on-going audit, administrative protest, claim
proceedings nor a judicial appeal.
applies in general. It provides:
Corporations. —
xxx xxx xxx
amended provides: DIHETS

xxx xxx xxx
xxx xxx xxx
With respect to a treaty that may be invoked by Silverlake and
other residents of the Netherlands, there is
Since tax treaties follow the principal method of classification
and assignment in mitigating the effects of double taxation of income
derived by a resident of a Contracting State from sources in the other
Contracting State, it is important to know how income derived
by Silverlake under the License Agreement is classified for purposes
of the Philippines-Netherlands tax treaty. Because the License
Agreement grants UCPB the right to use the Product, the
characterization of payments involving the use of software is
generally covered by Revenue Memorandum Circular No.
44-2005 (Taxation of Payments for Software), effective September 8,
2005. Section 5 of this Circular provides:
"Section 5. Characterization of Transactions. — The
character of payments received in a transaction involving the
transfer of computer software depends on the nature of the
rights that the transferee acquires under the particular
arrangement regarding the use and exploitation of the
program.
xxx xxx xxx
b. Transfer of copyrighted articles. A copyrighted
article incorporating a software includes a copy of
the software from which the work can be perceived,
reproduced, or otherwise communicated, either directly or
with the aid of a machine or device. The copy of
the software may be fixed in the magnetic medium of a floppy
disk or a CD-ROM, or in the main memory or hard drive of a
computer, or in any other medium.
If a person acquires a copy of a software but does not
acquire any of the rights described above (or only acquires a
de minimis grant of such rights), and the transaction does not
involve the provision of services or of know-how, the transfer
of the copy of the software is classified solely as a transfer of
a copyrighted article and payments for which constitute
business income."
Under Section 5, payments for the use of software can give
rise to either royalties or business profits. Payments for the use
of software are business profits when the person concerned merely
acquired a copy of the software and/or merely acquired a de minimis
right or rights for the use of the software.
Under the License Agreement, UCPB is permitted to use the
Product where UCPB's production and backup computers are located,
more specifically, its Primary Head Office Data Center and its
Disaster Recovery Data Center, the location of which shall be notified
to Silverlake from time to time, but such use does not permit UCPB to
translate, adapt, vary, modify, disassemble, decompile, or reverse
engineer the software in whole or in part. However, UCPB may, with
the prior written authorization of Silverlake, retain one copy of
the software for archive purposes only or for other purposes
authorized by Silverlake under certain conditions imposed on the
continued retention of the software. Because of the limited rights that
UCPB can exercise with respect to the use of the software, payments
to be made by UCPB to Silverlake cannot give rise to royalties but
should be characterized as business profits, in accordance with the
guidelines laid down in Section 5 of Revenue Memorandum Circular
No. 44-2005. ESHAIC
That UCPB may retain one copy of the Product for archive
purposes only or for other purposes authorized by Silverlake under
certain conditions imposed on the continued retention of
the software refers to a de minimis right which may be exercised with
or without the authorization of Silverlake under Section 189 of
the Intellectual Property Code of 1998 (Republic Act No. 8293).
Section 189 provides:
"Section 189. Reproduction of Computer Program. —
189.1. Notwithstanding the provisions of Section 177, the
reproduction in one (1) backup copy or adaptation of a
computer program shall be permitted, without the
authorization of the author of, or other owner of copyright in, a
computer program, by the lawful owner of that computer
program; Provided, That the copy or adaptation is necessary
for:
(a) The use of the computer program in conjunction
with a computer for the purpose, and to the extent, for which
the computer program has been obtained; and
(b) Archival purposes, and, for the replacement of the
lawfully owned copy of the computer program in the event
that the lawfully obtained copy of the computer program is
lost, destroyed or rendered unusable.
189.2. No copy or adaptation mentioned in this Section
shall be used for any purpose other than the ones determined
in this Section, and any such copy or adaptation shall be
destroyed in the event that continued possession of the copy
of the computer program ceases to be lawful.
189.3. This provision shall be without prejudice to the
application of Section 185 whenever appropriate." (Emphasis
supplied)
As business profits, payments to be made by UCPB
to Silverlake are subject to the provisions of paragraph 1, Article 7 of
the Philippines-Netherlands tax treaty as follows:
"Article 7
Business Profits
1. The profits of an enterprise of one of the States shall
be taxable only in that State unless the enterprise carries on
business in the other State through a permanent
establishment situated therein. If the enterprise carries on
business as aforesaid, the profits of the enterprise may be
taxed in the other State but only so much of them as is
attributable to that permanent establishment."
Under paragraph 1, such payments made to Silverlake may be
taxed in the Philippines if the same are attributable to a permanent
establishment which Silverlake has in the Philippines.
Relative thereto, a permanent establishment is defined in
paragraphs 1 and 2, Article 5 of the Philippines-Netherlands tax
treaty as follows:
"Article 5
1. For the purposes of this Convention, the term
'permanent establishment' means a fixed place of business in
which the business of the enterprise is wholly or partly carried
on.
2. The term 'permanent establishment' includes
especially:
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, quarry or other place of
exploration or extraction of natural resources;
g) a building site or construction or
assembly project or supervisory activities in
connection therewith, where such site, project
or activity continues for a period of more than
183 days;
h) the furnishing of services including
consultancy services by an enterprise through
an employee or other personnel where activities
of that nature continue (for the same or a
connected project) for a period or periods
twelve-month period. DTISaH
3. The term 'permanent establishment' shall be

deemed not to include:
a) the use of facilities solely for the
purpose of storage or display of goods or
merchandise belonging to the enterprise;
b) the maintenance of a stock of goods
or merchandise belonging to the enterprise
solely for the purpose of storage or display;
c) the maintenance of a stock of goods
or merchandise belonging to the enterprise
solely for the purpose of processing by another
enterprise;
d) the maintenance of a fixed place of
business solely for the purpose of purchasing
goods or merchandise, or for collecting
information, for the enterprise;
e) the maintenance of a fixed place of
business solely for the purpose of advertising,
for the supply of information, for scientific
research or for similar activities which have a
preparatory or auxiliary character, for the
enterprise.
4. A person acting in one of the States on behalf of an
enterprise of the other State — other than an agent of an
independent status to whom paragraph 6 applies — shall be
deemed to be a permanent establishment in the
first-mentioned State if:
a) he has, and habitually exercises in the
first-mentioned State, an authority to conclude
contracts in the name of the enterprise, unless
his activities are limited to the purchase of
goods or merchandise for the enterprise; or
b) he maintains in the first-mentioned
State a stock of goods or merchandise
belonging to the enterprise from which he
regularly delivers goods or merchandise on
behalf of the enterprise.
5. An insurance enterprise of one of the States shall,
except with regard to reinsurance, be deemed to have a
permanent establishment in the other State if it collects
premiums in the territory of that other State or insures risks
situated therein through an employee or through a
representative who is not an agent of an independent status
within the meaning of paragraph 6.
6. An enterprise of one of the States shall not be
deemed to have a permanent establishment in the other
State merely because it carries on business in that other
State through a broker, general commission agent or any
other agent of an independent status, where such persons
are acting in the ordinary course of their business.
7. The fact that a company which is a resident of one
of the States controls or is controlled by a company which is a
resident of the other State, or which carries on business in
that other State (whether through a permanent establishment
or otherwise), shall not of itself constitute either company a
permanent establishment of the other."
Based on the Certification of Non-Registration of
Corporation/Partnership dated November 18, 2008, issued by the
Securities and Exchange Commission that Silverlake is not
Philippines, it is deemed that Silverlake do not have a branch or
an office, and, consequently, a permanent establishment, in the
Philippines at least as of the date of the Certification on November 18,
2008. This being the case, payments to be made by UCPB
to Silverlake pursuant to the License Agreement, for the use by
UCPB of the Core Banking System Software Package, are exempt
from Philippine income tax. DSTCIa
On whether Article 12 (Royalties) of

the Philippines-Netherlands tax treaty will apply, Paragraph 4 of
Article 12 defines the term royalties as follows:
radio or television 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."
The UN Commentary on Article 12 (paragraph 14.3, p. 185, ©
OECD 2005) provides:
"14.3. Another type of transaction involving the
transfer of computer software is the more unusual case
where a software house or computer programmer agrees to
supply information about the ideas and principles underlying
the program, such as logic, algorithms or programming
languages or techniques. In these cases, the payments may
be characterized as royalties to the extent that they represent
consideration for the use of, or the right to use, secret
formulas or for information concerning industrial, commercial
or scientific experience which cannot be separately
copyrighted. This contrasts with the ordinary case in which a
program copy is acquired for operation by the end user."
Under Article IV of the License Agreement, UCPB under
certain condition may access the Source Code. In addition, it is given
the option to purchase the Source Code at 50% of the contract price
of the License Agreement, for the sole purpose of maintaining the
Product and not for re-sale purposes. Said payment shall be made
within 30 days after UCPB receives the invoice from Silverlake.
Based on this, the Office is of the opinion and so holds that
should UCPB make any payment to Silverlake for the Source Code
under Article IV of the License Agreement, the same will result
to royalty payments since there will be a transfer of know-how. It shall
therefore be subject to the preferential tax rate of 15 percent of the
gross amount of royalties pursuant to Article 12 (2) (b) of
the Philippines-Netherlands tax treaty considering that UCPB is not a
Board of Investments (BOI) registered enterprise engaged in
preferred areas of activities in the Philippines.
On whether such interest on overdue payments or penalty
charges are covered by Article 11 (Interest) of
the Philippines-Netherlands tax treaty, we take note that the same is
not treated as interest under this article. Paragraph 5 of Article 11
defines the term interest as follows:
"5. The term 'interest' as used in this Article means
income from Government securities, bonds or debentures,
whether or not secured by mortgage but not carrying a right to
participate in profits, and debt-claims of every kind as well as
all other income assimilated to income from money lent by
the taxation law of the State in which the income
arises. Penalty charges for late payment shall not be
regarded as interest for the purpose of this Article."
(Emphasis supplied)
Such interest on overdue payments or penalty charges cannot
be covered either by a residual article on other income or an article
on income not expressly covered by the preceding articles of a tax
treaty as such article is not present in the Philippines-Netherlands tax
treaty. Where such a residual article is lacking in
the Philippines-Netherlands tax treaty, interest on overdue payments
or penalty charges to be paid by UCPB to Silverlake under the
License Agreement are taxable in accordance with the domestic tax
laws of the Philippines. Particularly, and as previously mentioned,
such income shall be subject to income tax at the rate of thirty-five
percent (35%), now thirty percent (30%) based on the gross amount
thereof under Section 28 (B) (1) of the Tax Code of 1997, as
amended.
Under Section 108 (A) (1) of the Tax Code of 1997, as
amended by Republic Act No. 9337, the sale or exchange of
services, including the use or lease of properties, in the Philippines is
subject to value-added tax (VAT). Section 108 (A) (1) provides:
and collected, a value-added tax equivalent to ten percent
(10%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties: Provided,
that the President, upon the recommendation of the Secretary
of Finance, shall, effective January 1, 2006, raise the rate of
value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied: HAaDTI
(i) Value-added tax collection as a

percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth
percent (2 4/5%); or
(ii) National government deficit as a
percentage of GDP of the previous year
exceeds one and one-half percent (1 1/2%). 4
others for a fee, remuneration or consideration, . . ."
Under Section 105 of the Tax Code of 1997, while the VAT is
imposed on any person who sells, barters, exchanges, leases goods
or properties, and renders services, generally in the course of its
trade or business, this section likewise provides that services
rendered in the Philippines by a nonresident foreign person
like Silverlake is considered rendered in the course of trade or
business and as such will be subject to VAT. Section 105 provides:
imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount
of tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic
Act No. 7716.
The phrase 'in the course of trade or business' means
the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto,
by any person regardless of whether or not the person
engaged therein is a non-stock, non-profit private
organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their
guests), or government entity.
rendered in the course of trade or business." (emphasis
added)
Accordingly, pursuant to Section 4.114-2 of Revenue
Regulations No. 16-2005, 5 as amended by Revenue Regulations No.
4-2007, 6 UCPB, as the resident withholding agent, is liable to
withhold VAT on all payments to be made by it to Silverlake, the
nonresident recipient, pursuant to the License Agreement, at the rate
of 12 percent beginning February 1, 2006, and onwards. Section
4.114-2 provides:
"SEC. 4.114-2. Withholding of VAT on Government
Money Payments and Payments to Non-Residents. —
xxx xxx xxx
(b) The government or any of its political subdivisions,
instrumentalities or agencies including GOCCs, as well as
private corporation, individuals, estates and trust, whether
large or non-large taxpayers, shall withhold twelve percent
(12%) VAT, starting February 1, 2006, with respect to the
following payments:
(1) Lease or use of properties or property
rights owned by non-residents; and
(2) Other services rendered in the
Philippines by non-residents.
In remitting VAT withheld, the
withholding agent shall use BIR Form No. 1600
— Remittance Return of VAT and Other
Percentage Taxes Withheld.
VAT withheld and paid for the
non-resident recipient (remitted using BIR Form
No. 1600), which VAT is passed on to the
resident withholding agent by the non-resident
recipient of the income, may be claimed as
input tax by said VAT-registered withholding
agent upon filing his own VAT Return, subject
to the rule on allocation of input tax among
taxable sales, zero-rated sales and exempt
sales. The duly filed BIR Form No. 1600 is the
proof or documentary substantiation for the
Nonetheless, if the resident withholding
agent is a non-VAT taxpayer, said passed-on
VAT by the non-resident recipient of the income,
evidenced by the duly filed BIR Form No. 1600,
shall form part of the cost of purchased services,
which may be treated either as an 'expense' or
'asset', whichever is applicable, of the resident
withholding agent.
VAT withheld under this Section shall be
remitted within ten (10) days following the end
of the month the withholding was made."
In addition, UCPB is required to Withhold Final Income Tax and
issue the Certificate of Final Income Tax Withheld at Source, if it
collects interest on overdue payments or penalty charges, otherwise
it need not file if collections are purely for business profits for such is
exempt under the Philippines-Netherlands tax treaty, (BIR Form No.
2306) in quadruplicate, the first three copies thereof to be given
to Silverlake upon its request and the fourth copy to be retained by
UCPB as its file copy. TSIDaH

Very truly yours,
(SGD.) JOEL L. TAN-TORRES

Footnotes
1.Product — means the Core Banking System software package which
modules are stated in Annex A of the Agreement and
Enhancements and Customizations made by SILVERLAKE for such
modules in machine readable form together with manuals,
specifications or other documentation in printed form including but
not limited to listings, manuals, magnetic media to be furnished
under the Agreement and references to Product shall include
references to any part thereof (where applicable).
2.Site — means the site where UCPB's production and backup computers
are located as described in Annex B of the Agreement upon which
the Product shall be installed for use by UCPB. Annex B provides as
follows:
"ANNEX B
THE SITE
Machine Type Site
Production Machine Primary Head Office Data Center

Back-up Machine Primary Head Office Data Center
Development Machine Primary Head Office Data Center
Disaster Recovery MachineDisaster Recovery Data Center
3.Warranty Period means a period of fifteen (15) months from Live Date.
Live Date means the date that UCPB accepts the Product for live
implementation in UCPB's production environment for the first Pilot
Site.
5.Entitled Consolidated Value-Added Tax Regulations of 2005, dated
September 1, 2005, and effective 15 days after its publication.
6.Entitled Amending Certain Provisions of Revenue Regulations No.
16-2005, As Amended, Otherwise Known as the Consolidated
Value-Added Tax Regulations of 2005, dated February 7, 2007, and
effective 15 days after its publication.
July 27, 2015
Article 12,
treaty
Tantoco Villanueva
De Guzman & Llamas
Law Offices
4th & 6th Floors, Filipino Building
135 Dela Rosa Street, Legaspi Village
Makati City
Attention: Atty. Cristina M. F. Villanueva
Atty. Michael Dennis D. Rayala
Gentlemen :
This refers to your tax treaty relief application filed on April 4,

2012, on behalf of ZEPETTO, CO. ("Zepetto"), requesting
confirmation that the royalty payments by LEVEL UP! INC. ("Level
Up") to Zepetto are subject to a preferential tax rate of 10 percent,
pursuant to Article 12 of the Convention between the Republic of the
Philippines and the Republic of Korea for the Avoidance of Double
on Income ("Philippines-Korea tax treaty"). SDHTEC
It is represented that Zepetto is a corporation organized and

existing under the laws of Korea and is a resident of Korea based on
the Certificate of Residence issued by the Mapo District Tax Office of
the National Tax Service dated May 4, 2012; that Zepetto is not
Philippines as shown in the Certification of Non-Registration of
Company issued by the Securities and Exchange Commission on
April 12, 2012; that it is engaged in development, manufacture and
sales of game software and hardware; that, on the other hand, Level
Up is a domestic corporation duly organized and existing under
Philippine laws; and that Level Up is duly registered with the Board of
Investments (BOI) as pioneer new IT service firm in the field of an
application service provider.
It is further represented that on April 1, 2012, Zepetto, IP
E-Game Ventures, Inc. and Level Up entered into a Novation
Agreement wherein Zepetto, as the Licensor under the April 1,
2011 Software Development and License Agreement (License
Agreement) it had with IP E-Game, the Licensee, consented to the
assignment of the License Agreement to Level Up as the "new
Licensee"; that under the novated Licensed
Agreement, Zepetto grants to Level Up the exclusive rights to market
and distribute the online game, POINT BLANK, to end users and the
use of technical information for such purposes in the Philippines
including the right and license to use the trademarks and intellectual
property in connection with the license; that in consideration of the
license and other right granted, Level Up shall make payments of
License Fees to Zepetto, as follows:
a) First Initial Payment — One Hundred Thousand Dollars
(US$100,000);
b) Second Initial Payment — Fifty Thousand Dollars
(US$50,000.00) start of Open Beta Test;
c) Third Initial Payment — Fifty Thousand Dollars
(US$50,000.00) start of the Commercial Service;
d) Incentive Payment — One Hundred Thousand Dollars
(US$100,000) payable when the number of peak
concurrent users of the Game reaches ten-thousand
(10,000);
e) Monthly Royalty — Twenty-seven percent (27%) of gross
revenue upon commencement of commercial services
continuing for the term of the agreement; AScHCD
f) Advertising Payments 1 — 30% of the Net of the Advertising

Revenue.
It is finally represented, based on the Sworn Statement
by Level Up on April 2, 2012, that the transaction subject of the
involved; and, that per the Sworn Certification dated May 3, 2012
issued by Level Up, no payment of royalties have been paid yet
to Zepetto as of April 4, 2012.
In reply, please be informed that royalties derived in the
Philippines by a nonresident foreign corporation are, in general,
covered by Section 28 (B) (1) of the National Internal Revenue Code
(Tax Code) of 1997, as amended. It provides:
Corporations. —
xxx xxx xxx
all sources within the Philippines, such as . . .,
royalties . . .: Provided, That effective January 1,
percent (30%).
xxx xxx xxx"
amended, provides that:
xxx xxx xxx
shall be exempt from taxation under this Title: AcICHD
xxx xxx xxx
xxx xxx xxx"
In relation thereto, Article 12 of the Philippines-Korea tax treaty
which you invoked may apply to the herein case. It provides:
"Article 12
Royalties
that other State if such resident is the beneficial owner of
the royalties.
2. However, such royalties may 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 15 per
cent of the gross amount of the royalties.
3. Notwithstanding the provisions of paragraph 2 hereof, the
amount of tax imposed by the Philippines on the
royalties paid by a company, being a resident of the
Philippines, registered with the Board of Investments
and engaged in preferred pioneer areas of investment
under the investment incentives laws of the Philippines
to a resident of Korea, who is the beneficial owner of the
royalties, shall not exceed 10 per cent of the gross
right to use, any copyright of literary, artistic or scientific
work, 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, and includes payments of any kind
in respect of motion picture films and works on films or
videotapes for use in connection with television or tapes
for the use of radio broadcasting. TAIaHE
5. The provisions of paragraphs 1, 2 and 3 shall not apply if the

beneficial owner of the royalties, being a resident of a
Contracting State, carries on business in the other
Contracting State in which the royalties arise, through a
permanent establishment situated therein, or performs
in that other State independent personal services from a
fixed base situated therein, and the right or property in
respect of which the royalties are paid is effectively
connected with such permanent establishment or fixed
base. In such a case, the provisions of Article 7
(Business Profits) or Article 14 (Independent Personal
Services), as the case may be, shall apply.
xxx xxx xxx"
Based on the foregoing, royalty payments to a resident of
Korea arising in the Philippines may be taxed at the preferential tax
rate of either (i) 15 percent of the gross amount of the royalties; or (2)
10 percent of the gross amount of the royalties if the royalties are
paid by a company, being a resident of the Philippines, registered
with the Board of Investments and engaged in preferred pioneer
areas of investment under the investment incentives laws of the
Philippines.
Such being the case, since Zepetto is a resident of Korea
and Level Up is BOI-registered enterprise engaged in preferred
pioneer areas of investment, this Office is of the opinion and so holds
that the royalty payments by Level UP to Zepetto under the said
Agreement shall be subject to 10 percent of the gross amount of the
royalties, pursuant to Article 12 (3) of the Philippines-Korea tax treaty.
Moreover, as provided in Section 108 of the Tax Code of 1997,
as amended, the said royalty payments are subject to value-added
tax (VAT):
percent (12%) 2 of gross receipts derived from the sale
or exchange of services, including the use or lease of
properties. cDHAES
xxx xxx xxx

(3) The supply of scientific, technical, industrial or commercial
knowledge or information;
xxx xxx xxx"
payment of the VAT pursuant to Sections 4 and 6 of Revenue
Regulations No. 4-2002, Section 3 of Revenue Regulations No.
8-2002, and Section 7 of Revenue Regulations No. 14-2002, Level
Up shall be responsible for the withholding of VAT on the royalties
before remitting them to Zepetto. In remitting to the Bureau of Internal
Revenue the VAT withheld, Level Up shall use BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax & Other Percentage
Taxes Withheld). If it is a VAT-registered taxpayer, Level Up may use
as documentary substantiation for its claim of input VAT the duly filed
BIR Form No. 1600 and the proof of payment accompanying such
form. On the other hand, if it is a non VAT-registered taxpayer, Level
Up may include as part of the cost of the royalty fees to it
by Zepetto the VAT consequently shifted or passed on to it. In
addition, Level Up is required to issue the Certificate of Final Tax
Withheld at Source (BIR Form No. 2306) in quadruplicate, the first
three copies for Zepetto and the fourth copy for Level Up as its file
copy.
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
1."Advertising Revenue" — means any revenue actually collected from
advertisers with respect to advertisements included inside the play
area of the Game (including product placement, loading and
log-in/log-out pages) in the Territory, but shall not include revenue
arising from advertisements posted on web pages for the Games
but outside the play area for the Game. Advertising Revenue shall
not include any fees paid to third party agents in connection with
such advertising business, discounts, etc. payable to the third
parties as well as any and all relevant taxes.
with the Memorandum of the Executive Secretary to the Secretary
of Finance dated January 31, 2006, as circularized by Revenue
January 31, 2006 Approving the Recommendation of the
Secretary of Finance to Increase the Value-Added Tax Rate from
Ten Percent to Twelve Percent) dated January 31, 2006.
August 20, 2010

Articles 13 &
States tax treaty; Article 12,
Philippines-Bahrain tax
treaty; Articles 12 &
22, Philippines-Czech tax
treaty;
BIR Ruling No.
No. DA-ITAD-060-07;
BIR Ruling No.
DA-ITAD-032-08
Chevron Philippines Inc.

6/F 6750 Ayala Avenue
1226 Makati City, Philippines
Attention: Raissa Rodriguez-Bautista

Leo L. San Juan
Gentlemen :
This refers to your letter dated May 14, 2009 requesting for
relief from double taxation and confirmation of your opinion that
the royalty payments by Chevron Holdings Inc.-ROHQ
(CHI-ROHQ) to Chevron U.S.A., Inc. (CUSA) under the Project
Olympic Software License Agreement (Agreement) are subject to ten
percent (10%) final withholding tax pursuant to Article 13 (2) (b) (iii) of
the Philippines-United States tax treaty in relation to Article 12 (2) (b)
of the Philippines-Bahrain tax treaty. TIEHDC
It is represented that CUSA, with principal office address at

6001 Bollinger Cyn Road, San Ramon, California 94583, USA with
TIN: 25-0527925, is a nonresident foreign corporation and a resident
of the United States of America for purposes of U.S. taxation, as
evidenced by a Certification dated February 9, 2009, issued by the
Department of Treasury, Internal Revenue Service, Philadelphia, PA,
USA, signed by Ivy S. McChesney, Field Director, Accounts
Management; that it is not registered either as a corporation or as a
partnership in the Philippines per certification issued by the Securities
and Exchange Commission (SEC) dated December 17, 2008; that
CHI-ROHQ is a corporation organized and existing under the laws of
Delaware, United States of America and established as a Regional
Operating Headquarters in the Philippines, as a shared services
center in the Philippines with principal address at 35th Floor,
Yuchengco Tower, RCBC Plaza 6819 Ayala Avenue, 1200 Makati
City; that CHI-ROHQ provides finance and other qualifying services
to its affiliates.
It is further represented that on July 1, 2008 CUSA and
CHI-ROHQ entered into an Agreement, whereby CUSA, grants to
CHI-ROHQ a limited, non-transferable, non-exclusive license and
right to use the Project Olympic Software; that the Project Olympic
represents a complete overhaul of the Enterprise Resource Planning
systems used by Chevron's Global Downstream organization; that it
will harmonize the data and standardize the processes used in the
109 countries in which Global Downstream operates; that the Project
Olympic Software has fourteen primary functions:
1. Manage Accounting and Control Data
2. Provide Decision Support
3. Manage Plant, Equipment, and Facilities
4. Manage Human Resources
5. Market and Sell Products and Services
6. Manage Logistics
7. Manage Lubricants Supply Chain
8. Refine and Product Products
9. Project Management
10. Manage Capital and Risk
11. Perform Order Management ITAaCc
12. Procure Materials and Services

13. Manage Retail Real Estate
14. Manage Supply and Trading
That CHI-ROHQ shall annually pay the License Fee to CUSA in
twelve equal monthly installments for a period of ten years beginning
on July 1, 2008, in the amount of US$5,800.00 for the first year of the
term of this Agreement. For each subsequent year, CUSA shall
calculate the License Fee based on the total number of user seats
employed and the total charges for Project Olympic that are projected
to be incurred over the course of the project. CUSA notify CHI-ROHQ
of the amount of the annual License Fee within thirty (30) days prior
to the first billing of such year's License Fee.
It is finally represented that the issue/s or transaction subject of
the above request for ruling is not under investigation neither is it
subject of an on-going audit, administrative protest, claim for refund
or issuance of a tax credit certificate, collection proceedings nor a
judicial appeal.
In reply, please be informed that Section 7 (B) (2) of Revenue
Memorandum Circular No. 44-2005 provides, viz.:
"Section 7. Modes of Acquiring Software and the
Relevant Tax Treatment Thereof. —
xxx xxx xxx
B. Acquisition of copyright rights
xxx xxx xxx
2. By an End-user —
xxx xxx xxx
h. Directly from the foreign owner and/or
licensor of the software. —
A local end-user may acquire license to
use software directly from the foreign
licensor/owner of the software. Payments made
by the end-user to the licensor/owner are
royalties subject to 32 percent income tax
based on the gross amount thereof, imposed on
royalties derived by a nonresident foreign
corporation (Section 28[B][1], NIRC of 1997),
which amount shall be withheld and collected
by the end-user making the payments (Section
2.57-1[I][1], RR No. 2-98)." EaTCSA
However, if the foreign licensor/owner is

a resident of a country which has an existing tax
treaty with the Philippines, royalties paid thereto
are subject to the reduced tax rates on royalties
under the relevant tax treaty, provided the
condition prescribed therein are complied with
by the licensor/owner."
In relation thereto, Section 28 (B) (1) of the National Internal
Revenue Code (Tax Code) of 1997, as amended provides:
Corporations. —
xxx xxx xxx
Philippines, such as . . ., royalties, . . .: Provided,
That effective January 1, 2009, the rate of
income tax shall be thirty percent (30%).
xxx xxx xxx"
Based on the above provision of RMC 44-2005, in relation to
Section 28 (B) (1) of the Tax Code of 1997, as amended, payment by
CHI-ROHQ for acquisition of license to use software directly from
CUSA are, in general, subject to thirty-five percent (35%) income tax,
based on the gross amount thereof. Nonetheless, Section 32 (B) (5)
of the Tax Code of 1997, as amended provides:
xxx xxx xxx
xxx xxx xxx
Government of the Philippines. THcaDA
xxx xxx xxx"

In this particular case, the treaty involved is
the Philippines-United States tax treaty which, in its Article 13,
provides as follows:
"Article 13
ROYALTIES
State may be taxed by both Contracting States.
a) In the case of the United States, 15
percent of the gross amount of the royalties,
and
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
State.
thereof. cEDaTS
xxx xxx xxx"

In relation to Article 13 (2) (b) (iii) or the most-favored-nation
clause of the Philippines-United States tax treaty, CHI-ROHQ
invoked the provisions of the Philippines-Bahrain tax treaty, viz.:
"Article 12
Royalties
other State.
2. However, the royalties may also be taxed in the
laws of that State, but if the beneficial owner of the royalties is
a resident of the other Contracting State, the tax so charged
shall not exceed:
a) 15 per cent of the gross amount of
work including cinematograph films or tapes for
television or broadcasting, or
b) 10 per cent of the gross amount of
xxx xxx xxx"
Under Article 12 of the Philippines-Bahrain 1 tax treaty,
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, are subject to fifteen percent
(15%), or 10% in all other cases. Applying the Philippines-Bahrain tax
treaty, the royalty fee paid by CHI-ROHQ to CUSA for the use of the
Project Olympic Software will be subject to 15%.
Nevertheless, applying the "most-favored-nation" clause, the
tax rate of 10% can be granted based on the Philippines-Czech tax
treaty. Article 12 of the said treaty provides:
"Article 12
ROYALTIES
other State. aAHISE

shall not exceed:
work, other than that mentioned in
sub-paragraph (b), 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;
use, any copyright of cinematograph films, and
films or tapes for television or radio
broadcasting.
xxx xxx xxx"
Under Article 12 (2) (a) of the Philippines-Czech tax treaty,
royalties for information concerning industrial, commercial or
scientific experience; royalties for the use or right to use of any
copyright of literary, artistic or scientific work; and any patent, trade
mark, design or model, plan, secret formula or process, or any
industrial, commercial or scientific equipment, are subject to 10%
income tax based on the gross amount of royalties.
As for the mechanism employed in mitigating the effects of
double taxation, Article 23 of the Philippines-United States tax
treaty reads:
"Article 23
following manner:
principle hereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United
States tax the appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United States corporation
owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes
corporation paying such dividends with respect to the profits
out of which such dividends are paid. Such appropriate
amount shall be based upon the amount of tax paid or
accrued to the Philippines, but the credit shall not exceed the
limitations (for the purpose of limiting the credit to the United
States tax on income from sources within the Philippines or
on income from sources outside the United States) provided
by United States law for the taxable year. . . . ."
Likewise, Article 22 of the Philippines-Czech tax
treaty provides, viz.:
"Article 22
xxx xxx xxx
2. In the case of a resident of the Czech Republic,
double taxation shall be eliminated as follows:
a) The Czech Republic, when imposing
taxes on its residents, may include in the tax
base upon which such taxes are imposed the
items of income which according to the
provisions of this Convention may also be taxed
in the Philippines, but shall allow as a deduction
from the amount of tax computed on such a
base an amount equal to the tax paid in the
Philippines. Such deduction shall not, however,
exceed that part of the Czech tax, as computed
before the deduction is given, which is
appropriate to the income which, in accordance
with the provisions of this Convention, may be
taxed in the Philippines. IEaHSD
b) Where in accordance with any

provision of the Convention income derived by
a resident of the Czech Republic is exempt from
tax in the Czech Republic, the Czech Republic
may nevertheless, in calculating the amount of
tax on the remaining income of such resident,
take into account the exempted income."
Under the ordinary credit method, the United States and Czech
(as countries of residence) would limit a taxpayer's allowable tax
credit to that portion of the taxpayer's tax liability in their countries that
is attributable to the income that is taxed in the Philippines (the
country of source or country of situs). As a result of this limitation, if
the Philippines has an effective tax rate that exceeds the effective tax
rate of the United States and Czech on a particular income, the
United States and Czech would not grant the taxpayer a full credit for
holds that the license fees to be paid by CHI-ROHQ to CUSA under
the Agreement are subject to 10% income tax rate based on the
gross amount thereof, under Article 13 (2) (b) (iii) of
the Philippines-United States tax treaty, in relation to Article 12 (2) (a)
of the Philippines-Czech tax treaty. (BIR Ruling No.
ITAD-127-06 dated October 23, 2006; BIR Ruling No.
ITAD-060-07 dated May 11, 2007; BIR Ruling No.
ITAD-032-08 dated May 9, 2008)
Moreover, the said royalty payments by CHI-ROHQ to CUSA
shall be subject to the 12% value-added tax (VAT) under Section 108
of the Tax Code, as amended, which provides as follows:
Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any
of the following conditions has been satisfied:
xxx xxx xxx
performance of all kinds or services in the Philippines for
others for a fee, remuneration or consideration, including . . . .
The phrase 'sale or exchange of services' shall likewise
include:
model, plan secret formula or process, goodwill,
right;
xxx xxx xxx" 2
Accordingly, CHI-ROHQ, being the resident withholding agent
and payor in control of the payment, shall be responsible for the
payment to CUSA. In remitting the VAT withheld, CHI-ROHQ shall
substantiation for the claim of input tax by CHI-ROHQ upon filing its
own VAT return, if it is a VAT-registered taxpayer. In case CHI-ROHQ
is a non-VAT registered taxpayer, the passed-on VAT withheld shall
form part of the cost of goods or properties purchased which may be
treated as an "expense" or as an "asset", whichever is applicable. In
addition, CHI-ROHQ is required to issue the Certificate of Final
quadruplicate, the first three copies thereof to be given to CUSA upon
its request and the fourth copy to be retained by CHI-ROHQ as its file
copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as
amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended
by RR 04-07)] CAacTH

Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Entered into force on January 1, 2004.
2.Section 108 was amended by Republic Act No. 9337, which was signed
into law on May 24, 2005, which became effective on 1 November
2005. The VAT rate was increased to 12% on 1 February 2006 in
Secretary of Finance dated 31 January 2006, as circularized
by Revenue Memorandum Circular No. 07-2006 dated 31 January
2006.
||| (ITAD BIR Ruling No. 019-10, [August 20, 2010])
February 25, 2011
Article
12, Philippines-France Tax
Treaty; BIR Ruling No.
ITAD-005-09
Atty. Zenaida P. Alcantara, CPA

Unit 4G Pacopandana, 1845 Paz M. Guazon St.
Paco, Manila
Madam :
This refers to your letter dated January 15, 2010 requesting

confirmation of your opinion that the royalty fees to be paid
by Optodev, Inc. (Optodev) to Essilor International (Compagnie
Generale d' Optique) S.A. (Essilor) are subject to a preferential tax
rate of 15 percent pursuant to Article 12 of the Convention between
the Government of the Republic of the Philippines and the
Government of the French Republic for the Avoidance of Double
on Income ("Philippines-France tax treaty"). aDCIHE
It is represented that Essilor is a nonresident corporation

organized and existing under the laws of France as evidenced by its
Articles of Association; that its principal office is at 147 rue de Paris,
94220 Charenton-Le-Pont (Val de Marne) Cedex, France; that it is
not registered either as a corporation or as a partnership in the
Philippines as evidenced by the Certificate of Non-Registration of
Corporation/Partnership dated May 19, 2009 issued by the Securities
and Exchange Commission; that Optodev is a domestic corporation
with principal office address at B2 L2 Corner Star Avenue and
Interstar Streets, LIIP-SEPZ, Mamplasan, Biñan, Laguna; that it is a
Philippine Economic Zone Authority (PEZA) registered enterprise as
shown in a Certificate of Registration No. 97-051 dated July 10, 1997
engaged in the manufacture of plastic ophthalmic lenses.
It is further represented that on January 1,
1999Optodev entered into a Technology License Agreement (First
Agreement) with Essilor; that on January 1, 2000 they entered into
another separate Technology License Agreement (Second
Agreement); that under the First Agreement,
Essilor grants Optodev a non-exclusive license of the Technology 1 to
use the Technology in the Territory 2 and sell the Licensed
Products 3 throughout the world; that the parties acknowledged and
agreed that all right, title and interest in and to the Technology shall
not be transferred and shall at all time remain in, and belong
to, Essilor except to the extent provided in the First Agreement; that
to enable Optodev to use the Technology for the treatment of the
Licensed Products, Essilor shall disclose to Optodev the technical
information related to the Technology which will be sufficient to
enable Optodev to carry out the treatment of the Licensed Products;
that technical information shall include, inventions, and know-how,
whether or not patentable including chemical engineering, scientific
and practical information, reports and formulae; manufacturing data,
practices and procedures; equipment and system specifications,
operating, maintenance and safety instructions, analytical procedures,
machinery, plant and equipment designs; computer software and
other machine readable data and information, and information
contained on drawings, blueprints and in specifications, technical
reports and other writings; that Essilor shall provide Optodev with the
services and technical advice of skilled personnel; that in
consideration for the license granted by Essilor, Optodev shall pay
to Essilor a royalty of three percent (3%) of the selling price of the
Licensed Products; that the First Agreement shall enter into effect on
January 1, 1999 and shall continue for a period of ten (10) years,
unless one of the parties terminated the First Agreement in the
conditions of Article 13.2; that under the Second Agreement,
Essilor grants Optodev a non-exclusive License of the Technology
Rights 4 in order to use the Technology 5 for the manufacture of
Products 6 to be produced in the Philippines; that Optodev shall not
have the right grant sub-licenses of the Technology Rights without
prior written approval of Essilor; that in consideration for the license
granted by Essilor, Optodev shall pay Essilor a royalty equal to two
percent (2%) of the Net Turnover made by Optodev with the sales of
the Products; and that the issue or transaction subject of the above
application is not under investigation, on-going audit, administrative
protest, claim for refund or issuance of a tax credit certificate,
collection proceedings, or a judicial appeal.
amended, applies in general to royalty payments received by
nonresident foreign corporations. It provides:
Corporations. —
xxx xxx xxx
thirty percent (30%).CSTEHI
xxx xxx xxx"

amended, provides:
xxx xxx xxx
xxx xxx xxx
xxx xxx xxx"
In relation thereto, the provisions of the Philippines-France tax
treaty may apply to your request for relief particularly its Article 12,
which provides:
"Article 12
ROYALTIES
other State.
2. However, such royalties may be taxed in the
law of that State. However, the tax so charged shall, provided
that the royalties are taxable in the other Contracting State,
not exceed:
a) in the case of the Philippines, 15 per
cent of the gross amount of the royalties:
(i) paid by an enterprise
registered with the Philippines Board of
Investments and engaged in preferred
areas of activities, or
(ii) paid in respect of
cinematographic films or of works
recorded for broadcasting or television;
b) in all other cases, 25 per cent of the
scientific work including cinematographic films and works
recorded for broadcasting or television, 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,
xxx xxx xxx."
Under paragraph 2, Article 12 of the Philippines-France tax
treaty, the royalty payments will be taxed at the preferential tax rate
of 15 percent if the payor is a Board of Investments (BOI)-registered
enterprise and engaged in preferred pioneer areas of activities or
paid in respect of cinematographic films or of works recorded for
broadcasting or television, and in all other cases, 25 percent of the
gross amount of the royalties. However, Article 6 of
the Protocol amending the foregoing provisions, which took effect on
January 1, 2000, reads as follows:
"Article 6
Paragraph 2 of Article 12 of the Convention is deleted
and replaced by the following:
'2. However, such royalties may also be taxed in the
shall not exceed 15 percent of the gross amount of the
royalties.'"
holds that said royalty payments by Optodev to Essilor from the
period January 1, 1999 to December 31, 1999 under the First
Agreement shall be subject to a 25 percent preferential tax rate
while royalty payments under the First and Second Agreements from
January 1, 2000 onward shall be subject to a 15 percent preferential
tax rate on the gross amount thereof pursuant to Article 12 (2) of
the Philippines-France tax treaty, as amended. (BIR Ruling No. ITAD
005-09 dated February 12, 2009) AHECcT
As regards the imposition of the value-added tax (VAT) on the
transfer of technology by Essilor, please be informed further that
Section 108 of the Tax Code of 1997 7 provides as follows:
(Emphasis supplied)
xxx xxx xxx"
Thus, in general, VAT is imposed on the transfer of technology
by Essilor in the Philippines, such that on every payment
of royalty fees, Optodev is generally required to withhold such VAT
and treat the same as a "passed on" VAT, pursuant to Section
4.110-3 (b) of Revenue Regulations No. 7-95 as amended [now
Section 4.114-2 (b) of Revenue Regulations No. 16-05].
Technology (Philippines) (G.R. No. 153866, February 11, 2005), the
Supreme Court held, viz.:
"Special laws may certainly exempt transactions from
the VAT. 9 However, the Tax Code provides that those falling
under PD 66 are not. PD 66 is the precursor of RA 7916 —
the special law under which respondent was registered. The
purchase transactions it entered into are, therefore, not
VAT-exempt. These are subject to the VAT; respondent is
required to register.
xxx xxx xxx
Since the purchases of respondent are not exempt
from the VAT, the rate to be applied is zero. Its exemption
under both PD 66 and RA 7916 effectively subjects such
transactions to a zero rate, because the ecozone within which
it is registered is managed and operated by the PEZA as a
separate customs territory. This means that in such zone is
created the legal fiction of foreign territory. Under
the cross-border principle of the VAT system being enforced
by the Bureau of Internal Revenue (BIR), no VAT shall be
imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing
authority. If exports of goods and services from the
Philippines to a foreign country are free of the VAT, then the
same rule holds for such exports from the national territory —
except specifically declared areas — to an ecozone.
xxx xxx xxx
Applying the special laws we have earlier discussed,
and regulations.
to distinguish.
rule.EaSCAH

prohibited directly, it is also prohibited indirectly.
xxx xxx xxx"
Based on the foregoing, transactions exempt from VAT by
reason of PD 66 and RA 7916 are effectively zero-rated. However,
instead of zero-rating which is not available to non-resident suppliers,
the provision for exempt transactions under Section 109 (q) [now
Section 109 (K)] of the Tax Code of 1997 which provides VAT
Such being the case, the payment of royalty fees by Optodev,
being a PEZA-registered enterprise, to Essilor under the agreements
should be, as it is hereby confirmed to be, exempt from VAT.
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Technology means the technology consisting in a vacuum deposition
process used on ophthalmic lens substrates to provide
anti-reflective properties to the lens.
2.Territory means the national territory of the Philippines.
3.Licensed Products means the ophthalmic spectacle lenses incorporating
the technology.
4."Technology Rights" means intellectual property rights owned
by Essilor relating to the Molding Process including, but not limited
to, patent rights, processes, techniques, know-how, technical
information and trade secrets.
5."Technology" means the Molding Process.
6."Products" means organic spectacle lenses manufactured in accordance
with the Technology.
7.Please note that this cited provision has been retained by Republic Act
(RA) No. 9337, although with the modification as to the applicable
rate when the circumstances so warrant.
8.Effective February 1, 2006, the rate shall be 12%.
9.Referring to the old Section 109 (q) of the Tax Code of 1997 [now Section
109 (K), as amended by RA No. 9337].
October 3, 2014
Article 12
(Royalties) Philippines-Fran
ce tax treaty, as amended
Baniqued and Baniqued

Attorneys at Law
8th Floor, Jollibee Centre
San Miguel Avenue
Pasig City
Attention: Atty. Emma Malou U. Lim
Gentlemen :

December 28, 2011 requesting confirmation that royalties paid
to Lafarge SA ("Lafarge") by Republic Cement Corporation
("Republic Cement"), Mindanao Portland Cement Corporation
("Mindanao Cement") and Iligan Cement Corporation ("Iligan
Cement") are subject to income tax at the rate of 15 percent pursuant
to the Convention between the Government of the Republic of the
Philippines and the Government of the French Republic for the
with Respect to Taxes on Income. ("Philippines-France tax treaty"). 1
Facts
Lafarge is a foreign corporation and a resident of France based
on its Articles of Association and Certificate of Residence issued by
the Direction Générale des Finances Publiques of France on
December 22, 2011. Lafarge is located at 61, Rue des
Belles-Feuilles, Paris, France. Lafarge is not registered as a
corporation or partnership in the Philippines based on the
and Exchange Commission on January 22, 2012. On the other
hand, Republic Cement, Mindanao Cement and Iligan Cement are
domestic corporations all located at 25th Floor, Salcedo Tower, 169
H.V. dela Costa Street, Salcedo Village, Makati City, Philippines.
CIAHaT
Agreements with Republic Cement

On January 1, 2012, Republic Cement and Lafarge entered
into an Intellectual Property License
Agreement where Lafarge granted Republic Cement a
non-exclusive, royalty-bearing right to use intangible properties for
the manufacture, use and application of regular and special cements,
cement additives, and any other hydraulic binding materials. These
properties are know-how, patents, and, if any, some registered
product brands to accompany the sale of the
products. Know-how refers to (1) industrial standards; tools and data;
procedures, methodologies, policies, among others, which can be
accessed through Lafarge L.O Cement Portal, and (a)
technical software used in cement plant. Patents refer to the patent
"Dreamclay Cementitious" (application for registration on October 8,
2009 and pending registration to date). With respect to Product
Brands, there is no application for the registration of any brand to
date. In consideration, Republic Cement will pay Lafarge an annual
license fee (royalty) equivalent to 2.5 percent of Republic
Cement's consolidated net turnover, which is the total turnover of all
products sold (domestic and export) on a stand-alone basis after
deducting turnover from other business activities, external purchased
clinker for production, cost of purchased products for sale (cement),
and cost of freight to customers. The fee will be made in euros and
computed quarterly and paid on the date indicated in the invoice to be
issued by Lafarge to Republic Cement. The Agreement took effect on
January 1, 2012 for initial term of one year; thereafter, the Agreement
will be tacitly renewed for additional successive periods of one year.
On January 1, 2012, Republic Cement and Lafarge entered
into a Master Brand Agreement where Lafarge granted Republic
Cement a limited, non-exclusive, non-sub licensable, royalty-bearing
right to use trademarks for the manufacture and sale of construction
materials. These trademarks are the logo "Lafarge" (under
Registration No. 4-1999-005048 issued on August 17, 2006) and the
baseline "Bringing Materials to Life" (application for registration on
April 19, 2010 and pending registration to date). In
consideration, Republic Cement will pay Lafarge an annual license
fee (royalty) equivalent to 1.5 percent of Republic Cement's
consolidated net turnover, which is the total turnover of all products
sold (domestic and export) to third parties after deducting turnover
from other business activities and cost of freight to customers. The
fee will be made in euros and computed quarterly and paid on the
date indicated in the invoice to be issued by Lafarge to Republic
Cement. The Agreement took effect on January 1, 2012 for an initial
term of one year; thereafter, the Agreement will be tacitly renewed for
additional successive periods of one year. CTEaDc
Agreement with Mindanao Cement
On January 1, 2012, Mindanao Cement and Lafarge entered

into a Master Brand Agreement where Lafarge granted Mindanao
Cement a limited, non-exclusive, non-sub licensable, royalty-bearing
right to use trademarks for the manufacture and sale of construction
materials. These trademarks are the logo "Lafarge" (under
Registration No. 4-1999-005048 issued on August 17, 2006) and the
baseline "Bringing Materials to Life" (application for registration on
April 19, 2010 and pending registration to date). In
consideration, Mindanao Cement will pay Lafarge an annual license
fee (royalty) equivalent to 1.5 percent of Mindanao Cement's
sold (domestic and export) to third parties after deducting turnover
from other business activities and cost of freight to customers. The
fee will be made in euros and computed quarterly and paid on the
date indicated in the invoice to be issued by Lafarge to Mindanao
Cement. The Agreement took effect on January 1, 2012 for an initial
term of one year; thereafter, the Agreement will be tacitly renewed for
additional successive periods of one year.
Agreement with Iligan Cement
On January 1, 2012, Iligan Cement and Lafarge entered into
an Intellectual Property License
Agreement where Lafarge granted Iligan Cement a
non-exclusive, royalty-bearing right to use intangible properties for
the manufacture, use and application of regular and special cements,
cement additives, and any other hydraulic binding materials. These
properties are know-how, patents, and, if any, some registered
product brands to accompany the sale of the
products. Know-how refers to (1) industrial standards; tools and data;
procedures, methodologies, policies, among others, which can be
accessed through Lafarge L.O Cement Portal, and (a)
technical software used in cement plant. Patents refer to the patent
"Dreamclay Cementitious" (application for registration on October 8,
2009 and pending registration to date). With respect to Product
Brands, there is no application for the registration of any brand to
date. In consideration, Iligan Cement will pay Lafarge an annual
license fee (royalty) equivalent to 2 percent of Iligan Cement's
sold (domestic and export) on a stand-alone basis after deducting
turnover from other business activities, external purchased clinker for
production, cost of purchased products for sale (cement), and cost of
freight to customers. The fee will be made in euros and computed
quarterly and paid on the date indicated in the invoice to be issued
by Lafarge to Iligan Cement. The Agreement took effect on January 1,
2012 and has an initial term of one year or up to December 31, 2012;
thereafter, the Agreement will be tacitly renewed for additional
successive periods of one year.
Ruling
In reply, please be informed that under Section 28(B)(1) of
amended, income payments including royalties made to a foreign
corporation not engaged in trade or business in the Philippines are
subject to income tax at the rate of 30 percent, to wit:
Corporations —
xxx xxx xxx
However, under Section 32 (B) (5) of the Tax Code, such
income is exempt or partially exempt to the extent required by any
treaty obligation on the Philippines, to wit:
xxx xxx xxx
xxx xxx xxx
Government of the Philippines. " EDcIAC
In this regard, paragraphs 1 and 2, Article 12 of the

amended Philippines-France tax treaty provides relief to royalties
arising in the Philippines and paid to a resident of France, to wit:
"Article 12
Royalties
that other State.
tax so charged shall not exceed 15 percent of the gross
scientific work including cinematographic films and
works recorded for broadcasting or television, any
formula or process, or for the use of, or the right to use,
industrial, commercial, or scientific equipment, or for
scientific experience."
Under Article 12, such royalties may be taxed in the Philippines
at a rate not to exceed 15 percent. The term royalties means
including cinematographic films and works recorded for broadcasting
or television, any patent, trade mark, design or model, plan, secret
formula or process, or for the use of, or the right to use, industrial,
industrial, commercial or scientific experience. IcHTAa
Accordingly, royalties paid to Lafarge by Republic Cement,

Mindanao Cement and Iligan Cement under the Intellectual Property
License Agreement and Master Brand Agreement for the use of
know-how, patents, and trademarks in the manufacture, use,
application, and sale of cements, cement additives, other hydraulic
binding materials, and other construction materials, are subject to
income tax at the rate of 15 percent, pursuant to paragraph 2, Article
12 of the amended Philippines-France tax treaty.
Furthermore, under Section 108 (A) of the Tax Code, the said
royalties for the use of certain intangible properties in the Philippines
are subject to value-added tax ("VAT"), to wit:
including the use or lease of properties selling
price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax
to be paid by the seller or transferor: Provided,
twelve percent (12%). . ."
Relative thereto, Republic Cement, Mindanao
Cement and Iligan Cement shall each withhold VAT on the royalties
at the rate of 12 percent before remitting them to Lafarge. The
domestic corporations shall use BIR Form No. 1600 (Monthly
Withheld). The duly filed BIR Form No. 1600 and its accompanying
proof of payment shall serve as documentary substantiation for the
claim of input VAT by the domestic corporations on the royalties;
otherwise, if they are not VAT-registered taxpayers, the passed-on
VAT shall form part of the cost of the leased intangible properties
which may be treated as an "asset" or "expense", whichever is
the end of the month the withholding was made. 3 CAIHTE

Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.As amended by the Protocol to the Tax Convention between the
Government of the Republic of the Philippines and the Government of
the French Republic Signed on January 9, 1976 effective January 1,
1998.
2.The VAT rate is increased to twelve percent on February 1, 2006, in
xxx xxx xxx
and
xxx xxx xxx
Withheld.
agent.
January 10, 2012
Article
treaty, as amended;
BIR Ruling No. ITAD
37-11
J-Sys Philippines, Inc.

JGC Philippines Building (Annex)
1606 Trade Street corner Investment Drive
Madrigal Business Park, Ayala Alabang
Muntinlupa City
Attention: Mitsuharu Hamada

President and General Manager
Gentlemen :
This refers to your tax treaty relief application ("TTRA") filed on

November 22, 2008 requesting confirmation that payments made
by J-Sys Philippines, Inc. ("J-Sys Philippines") to JGC Information
Systems Company Ltd. ("JGC Information") are subject to
preferential tax under the Convention between the Republic of the
Income ("Philippines-Japan tax treaty"), as amended by
a Protocol 1 effective January 1, 2009. EDcIAC
Facts
JGC Information is a foreign corporation organized and
existing under the laws of Japan and is a resident thereof based on
the Certification of Complete Records issued by the Yokohama Legal
Affairs Bureau in Japan on April 18, 2008, and on the Residence
Certificate issued by the Yokohama Naka Tax Office in Japan on
November 17, 2008. JGC Information is situated at the 15th Floor,
MM Park Building, 3-6-3 Minatomirai, Nishi-ku, Yokohama-shi,
Kanagawa, Japan. JGC Information is not registered as a corporation
or partnership in the Philippines based on the Certification of
Non-Registration issued by the Securities and Exchange
Commission on May 8, 2008. On the other hand, J-Sys Philippines is
a domestic corporation situated at 1606 Trade Street corner
Investment Drive, Madrigal Business Park, Ayala Alabang,
Muntinlupa City, Philippines.
On March 1, 2008, JGC Information and J-Sys
Philippines entered into a Software Distributorship
Agreement where JGC Information granted J-Sys Philippines the
right to market and distribute the e-Plantia Plant Maintenance
Management System ("Software") developed by and belonging
to JGC Information. JGC Information also granted J-Sys
Philippines the right to use the documents relating to
the Software and will provide related trainings and installation support
services thereto. The copyright and other rights attached to
the Software are owned by JGC Information before and after the
delivery of the Software and such right may not be transferred
to J-Sys Philippines or to any customer thereof. JGC Information will
render maintenance support to the customers of J-Sys
Philippines under the relevant maintenance contracts they entered
with J-Sys Philippines, and JGC Information may also provide these
customers, the relevant trainings, installation support, and
development of related systems. The standard price of
the Software and the related maintenance support thereto is
equivalent to 40 percent of the invoice price of the Software and the
support. J-Sys Philippines will pay JGC Information on the last day of
the next calendar month following the date of delivery of
the Software and such payment will be in United States dollars. J-Sys
Philippines will market and distribute the software in any country
worldwide except Japan. The Agreement took effect on March 1,
2008, and will continue to be in effect indefinitely.
Ruling
of tax) shall be preceded by an application filed at the International
Tax Affairs Division ("ITAD") of this Bureau at least 15 days
before the intended transaction or payment of income, thus:
"III. Policies:
xxx xxx xxx
the relief. . . " (Emphasis ours)
it ruled:
Code, unless it is shown, that the treaty provisions apply to the
been successfully invoked.
the petitioner: It must be stressed that BIR rulings are issued
case of petitioner." (Emphasis ours) EATcHD
This decision was upheld by the Supreme Court in a

In view of the foregoing, since the subject Agreement took
effect on March 1, 2008, and will continue to be in effect indefinitely,
and the subject TTRA was filed only on November 22, 2008, this
Office hereby DENIES relief on those payments made by J-Sys
Philippines to JGC Information before the fifteenth day following the
date of filing of the TTRA, or on December 7, 2008, pursuant to
Section III (2) of RMO 1-2000. Accordingly, these payments shall be
subject to income tax at the rate under Section 28 (B) (1) of the
to wit:
Corporations. —
xxx xxx xxx
in this Code, a foreign corporation not engaged in trade
or business in the Philippines shall pay a tax equal to
thirty-five percent (35%) of the gross income received
during each taxable year from all sources within the
Philippines, such as interests, dividends, rents, royalties,
salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits and income, and
capital gains, except capital gains subject to tax under
subparagraph 5(c) and (d) above: Provided, That
effective January 1, 2009, the rate of income tax shall be
On the other hand, payments made by J-Sys
Philippines to JGC Information on December 7, 2008 and
thereafter, being essentially royalties for the use of copyright of
literary, artistic or scientific work, shall be subject to income tax at the
rate of 25 percent (before January 1, 2009) and 10 percent
(beginning January 1, 2009 and thereafter) pursuant to paragraph 2,
in relation to paragraph 4, Article 12 of the Philippines-Japan tax
treaty, to wit:
"Article 12
a) 15 percent of the gross amount of the royalties
if the royalties are paid in respect of the use of or the
right to use cinematograph films and films or tapes for
radio or television broadcasting;
in all other cases.
xxx xxx xxx
experience."
The Protocol amended paragraph 2 by reducing the rate in
subparagraph (b) to 10 percent, thus:
"2. However, such royalties may also be taxed in the
xxx xxx xxx
in all other cases." (BIR Ruling No. ITAD 37-11 dated
February 2, 2011)
In connection with the use of copyright pertaining
to software or computer program, the fact that under
the Software Distributorship Agreement, J-Sys Philippines has the
right to market and distribute to the public the e-Plantia Plant
Maintenance Management System Software developed by and
belonging to JGC Information deems J-Sys Philippines to utilize
the copyrights or economic rights of the Software, as clearly
mentioned in Section 5 (a) (v) of Revenue Memorandum Circular No.
44-2005 (Taxation of Payments for Software), in relation to Section
177 of the Intellectual Property Code of the Philippines, to wit: CaAIES

arrangement regarding the use and exploitation of the program.
a. Transfer of copyright rights. A transfer of software is
classified as a transfer of a copyright right if, as a result of the
transaction, a person acquires any one or more of the rights
described below:
i. The right to make copies of the software for
purposes of distribution to the public by sale or other
transfer of ownership, or by rental, lease or lending;
ii. The right to prepare derivative computer
programs based upon the copyrighted software;
iii. The right to make a public performance of
the software;
iv. The right to publicly display the computer
program or
v. any other rights of the copyright owner, the
exercise of which by another without his authority shall
constitute infringement of said copyright.
The determination of whether a transfer of a
copyright right in a software is a sale or exchange of
property is made on the basis of whether, taking into
account all facts and circumstances, there has been a
transfer of all substantial rights in the copyright. A
transaction that does not constitute a sale or exchange
because not all substantial rights have been transferred
will be classified as a license generating royalty income.
When only copyright rights are transferred,
payments made in consideration therefor are
royalties. On the other hand, when copyright ownership
is transferred, payments made in consideration therefor
are business income.
"Section 177. Copyright or Economic Rights. — Subject
to the provisions of Chapter VIII, copyright or economic rights
shall consist of the exclusive right to carry out, authorise or
prevent the following acts:
177.1. Reproduction of the work or substantial
portion of the work;
177.2. Dramatization, translation, adaptation,
abridgment, arrangement or other transformation of the
work;
177.3. The first public distribution of the original
and each copy of the work by sale or other forms of
transfer of ownership;
177.4. Rental of the original or a copy of an
audiovisual or cinematographic work, a work embodied
in a sound recording, a computer program, a compilation
of data and other materials or a musical work in graphic
form, irrespective of the ownership of the original or the
copy which is the subject of the rental;
177.5. Public display of the original or a copy of
the work; and SECcAI
177.6. Other communication to the public of the

work." (Emphasis ours)
Finally, under Section 108 (A) of the Tax Code, the royalties at
hand, being payments for the use of intangible property (copyright) in
the Philippines, are subject to value-added tax ("VAT"), to wit:
exchange of services, including the use or lease of properties
selling price or gross value in money of the goods or properties
sold, bartered or exchanged, such tax to be paid by the seller
or transferor: Provided, that the President, upon the
recommendation of the Secretary of Finance, shall, effective
January 1, 2006, 2 raise the rate of value-added tax to twelve
satisfied. . . "
Relative thereto, J-Sys Philippines shall withhold VAT on the
royalties at the rate of 12 percent before remitting them to JGC
Information. J-Sys Philippines shall use BIR Form No. 1600 (Monthly
Withheld). If it is a VAT-registered taxpayer, the duly filed BIR Form
No. 1600 and its accompanying proof of payment shall serve as
documentary substantiation for J-Sys Philippines' claim of input tax
on the royalties. Otherwise, J-Sys Philippines may treat such VAT as
an asset or expense, whichever is applicable. VAT withheld shall be
remitted within 10 days following the end of the month the withholding
was made. 3
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Revenue
Footnotes
of Fiscal Evasion with Respect to Taxes on Income.
2.The VAT rate was increased to 12 percent on February 1, 2006, in
"SEC 4.114-2. Withholding of VAT on Government Money Payments and
xxx xxx xxx
agencies including GOCCs, as well as private corporations,
individuals, estates and trusts, whether large or non-large taxpayers,
shall withhold twelve percent (12%) VAT, starting February 1, 2006,
with respect to the following payments:
and
Withheld.
agent.
||| (ITAD BIR Ruling No. 003-12, [January 10, 2012])
October 10, 2005
Article
tax treaty BIR Ruling No.
DA-ITAD-108-03
Wordtext Systems, Inc.

7/F SEDCCO I Building
Legaspi cor. Rada Sts.,
Attention: Ms. Remedies L. Chua

Vice President-Finance
Gentlemen :
This refers to your letter dated August 17, 2004, requesting the
availment of the 25% tax treaty rate on royalties arising from
payments made by Wordtext Systems Inc. (Wordtext) to IBM
Singapore Pte. Ltd. (IBM), under an Agreement authorizing Wordtext
as a remarketer of workstation software which includes programs and
services from IBM, pursuant to the Philippines-Singapore tax treaty.
It is represented that IBM is a nonresident foreign corporation
with address at #9 Changi Business Park, Central 1, Singapore
486048 and is certified by the Inland Revenue Authority of Singapore
as a resident of Singapore for income tax purposes for the years
2004 and 2005; that it is not registered either as a corporation or as a
partnership licensed to engage in trade or business in the Philippines
per Certification issued by the Securities and Exchange Commission
dated August 20, 2004; that Wordtext is a corporation organized and
existing under the laws of the Philippines with principal address at 7/F
SEDCCO 1 Building, Legaspi corner Rada Sts., Legaspi Village,
Makati City; that on September 5, 2003, IBM and Wordtext entered
into a Business Partner Agreement (Agreement) wherein Wordtext
was approved by IBM as a remarketer of workstation software which
includes Programs and Services from the IBM Corporation; and that
the amounts payable for each Program and Software are due upon
receipt of invoice and payable as specified in a transaction.
In reply, please be informed that Article 12 of
the Philippines-Singapore tax treaty provides that:
"Article 12
"Royalties"
"1. Royalties arising in a Contracting State and paid to
other State.
"2. However, such royalties may also be taxed in the
law of that State, but, if the recipient is the beneficial owner of
the royalties, the tax so charged shall not exceed: DEScaT
"a) in the case of the Philippines, 15 per

cent of the gross amount of the royalties, where
the royalties are paid by an enterprise
registered with the Philippine Board of
Investments and engaged in preferred areas of
activities and also royalties in respect of
cinematographic films or tapes for television or
broadcasting;
"b) in the case of Singapore, where the
royalties are approved under the Economic
Expansion Incentives (Relief from Income Tax)
Act of Singapore, the royalties shall be exempt;
"c) in all other cases, 25 per cent of the
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 abovecited provisions, royalties arising from
sources within the Philippines and derived by a resident of Singapore
shall be subject to the following preferential tax rates: (a) a rate not
exceeding 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; (b)
in the case of Singapore, where the royalties are approved under the
Economic Expansion Incentives (Relief from Income Tax) Act of
Singapore, the royalties shall be exempt; or (c) in all other cases, a
rate not to exceed 25 percent of the gross amount of the royalties.
Such being the case, and since Wordtext is not a corporation
registered with the Philippine Board of Investments which is engaged
in preferred areas of activities, this Office is of the opinion and so
holds that the fees paid by Wordtext to IBM pursuant to their
Agreement, being royalties, shall be subject to income tax at a rate of
25 percent, based on the gross amount thereof. (BIR Ruling No.
DA-ITAD-108-03 dated July 29, 2003)
Finally, the said royalty fees by Wordtext to IBM are subject to
the 10% value-added tax (VAT) pursuant to Section 108 of the Tax
Code of 1997. Accordingly, Wordtext, being the resident withholding
agent and payor in control of the payment shall be responsible for the
withholding, of the 10% VAT on such royalty fees before remitting
any payment to IBM. In remitting the VAT withheld, Wordtext shall
substantiation for the claim of input tax by Wordtext upon filing its
own VAT Return, if it is a VAT-registered taxpayer. In case Wordtext
is a non-VAT registered taxpayer, the passed-on VAT withheld shall
form part of the cost of the service purchased which may be treated
as an "expense" or an "asset", whichever is applicable. In addition,
Wordtext is required to issue the Certificate of Final Tax Withheld at
Source (BIR Form No. 2306) in quadruplicate, the first three copies
thereof to be given to IBM upon its request, and the fourth copy to be
retained by Wordtext as its file copy. [Section 4 & 6, Revenue
Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7
of RR No. 14-2002].
the facts are different, then this ruling shall be without force and effect
insofar as the herein parties are concerned. IDcTEA
Very truly yours,
Revenue
By:
(SGD.) JAMES H. ROLDAN

Legal Service
||| (ITAD Ruling No. 117-05, [October 10, 2005])
December 6, 2013
Article 12
(Royalties), Philippines-Jap
an tax treaty
Team Studio Japan KK

Otemachi Tatemono Kamiyacho Bldg. 2F,
5-12-13 Toranomon, Minato-ku,
Tokyo, Japan 105-0001
Attention: Margaret Acaylar

Authorized Representative
Gentlemen :

on 07 January 2013 requesting confirmation that royalties paid
by Manila Electric Company ("MERALCO") to Team Studio Japan
K.K. ("Team Studio-Japan") are subject to income tax at the rate of
10 percent pursuant to the Convention between the Republic of the
Prevention of Fiscal Evasion with Respect to Taxes on Income as
amended by the Protocol ("Philippines-Japan tax treaty"). IaEASH
Facts
It is represented that Team Studio-Japan is a corporation
organized and existing under the laws of Japan with business
address at Otemachi, Tatemono Kamiyacho Building 2F, 5-12-13
Toranomon, Minato-ku, Japan based on the notarized and
consularized Certificate of Residence issued by the District Director
of Shiba Tax Office in Japan and is engaged in the business of (1)
research, architect, development, manufacturing, sales, marketing,
and technical support of computer software products; and (2) any
other business related thereto based on the notarized and
consularized Articles of Incorporation of Team Studio-Japan. The
company Team Studio-Japan is not registered as a corporation or
Commission on 27 November 2012. On the other hand, MERALCO is
a domestic corporation with business address at 4/F Lopez Building,
MOC Ortigas Avenue, Pasig City.
Team Studio-Japan and MERALCO entered into a
Subscription License Agreement on 30 December 2012 for use of
AirWatch software based on a notarized and consularized Team
Studio Order Form for AirWatch and End User License Agreement.
MERALCO shall pay to Team Studio-Japan the corresponding
royalties under the following terms and fees: 1
Unit Price Subtotal Discount
Product Description Term Qty. Total
US$ US$ (%)
with no
Discount
AirWatchTM Hosted $48.00 per 1 year 600 $28,800 $1,080 $27,720
Subscription &
year device ($3.85/mo.
Hosting
($4.00/mo.) per device)
AirWatchTM Account $1,500 One 1 $1,500 $1,500
Time
Activation
Fee
AirWatchTM Service $10,000 One 1 $10,000 $10,000
Time
pack-Enterprise-90
Fee
hours of support
24x7 Support
Services
––––––
Total in
$39,220
US$
======
As per Certification issued by Sumitomo Banking Corporation
of Japan, MERALCO made a remittance of Thirty Nine Thousand
Two Hundred Twenty US Dollars (US$39,220.00) in favor of Team
Studio-Japan for payment of royalties on 08 January 2013.
proceedings, or judicial appeal, based on the statement issued by the
Senior Assistant Vice-President of MERALCO on 19 July 2013.
Ruling
National Internal Revenue Code of 1997 ("NIRC of 1997"), as
amended, royalty payments made to Team Studio-Japan is subject
to income tax at the rate of 30 percent, thus:
—
xxx xxx xxx
HaEcAC
However, under Section 32 (B) (5) of the NIRC of 1997, these

royalties may be exempt from income tax or subject to a reduced rate
to the extent required by any treaty obligation on the Philippines,
thus:
xxx xxx xxx
xxx xxx xxx
For this purpose, you invoke the Philippines-Japan tax treaty,
as amended. Article 12, thereof provides:
"Article 12
shall not exceed:
(a) 15 per cent of the gross amount of the royalties if the
(b) 10 per cent of the gross amount of the royalties in all
other cases."
Based on the foregoing, royalty payments made by a
Philippine enterprise to a Japanese enterprise may be subject to the
preferential tax rate of (i) 15% of the gross amount of royalties if the
royalties are paid in respect to the use of or the right to use
broadcasting; or (ii) 10% of the gross amount of royalties in other
cases. It appearing that the gross amount of royalties to be paid by
MERALCO to Team Studio-Japan is not for the use of cinematograph
films and films or tapes for radio or television broadcasting,
such royalty payments are subject to the preferential rate of 10% of
the gross amount of royalties.
Moreover, the said royalty payments by MERALCO to Team
Studio-Japan shall be subject to the 12% value-added tax (VAT)
under Section 108 of the Tax Code, as amended, which provides as
follows:ICHAaT

Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied:
xxx xxx xxx
performance of all kinds or services in the Philippines for others
for a fee, remuneration or consideration, including. . . . The
phrase 'sale or exchange of services' shall likewise include:
any copyright, patent, design or model, plan secret formula or
process, goodwill, trademark, trade brand or other like property
or right;
xxx xxx xxx"
Accordingly, MERALCO, being the resident withholding agent
and payor in control of the payment, shall be responsible for the
payment to Team Studio-Japan. In remitting the VAT withheld,
MERALCO shall use BIR Form No. 1600 (Monthly Remittance Return
of Value-Added Tax and Other Percentage Taxes Withheld). The
duly filed BIR Form No. 1600 and proof of payment thereof shall
serve as documentary substantiation for the claim of input tax by
MERALCO upon filing its own VAT return, if it is a VAT-registered
taxpayer. In case MERALCO is a non-VAT registered taxpayer, the
passed-on VAT withheld shall form part of the cost of goods or
properties purchased which may be treated as an "expense" or as an
"asset", whichever is applicable. In addition, MERALCO is required to
issue the Certificate of Final Income Tax Withheld at Source (BIR
given to Team Studio-Japan upon its request and the fourth copy to
be retained by MERALCO as its file copy. [Section 4.110.3
(b), Revenue Regulations No. (RR) 7-95, as amended by RR
08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07);
Section 4.114 (d), as amended by RR 28-03].
insofar as the herein parties are concerned. aSDHCT
Very truly yours,

(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Page 1 of the Team Studio Order for AirWatch.
||| (ITAD BIR Ruling No. 340-13, [December 6, 2013])
June 14, 2013
Article
treaty
Isla Lipana and Co.

Makati City
Gentlemen :

on February 13, 2009 requesting confirmation that royalties paid
by Panasonic Precision Devices Philippines Corporation ("Panasonic
Precision Philippines") to Panasonic Communications Company Ltd.
("Panasonic Communications") are subject to a reduced rate of
income tax pursuant to the Convention between the Republic of the
Income ("Philippines-Japan tax treaty"), as amended by
a Protocol 1 effective January 1, 2009.
Facts
Panasonic Communications is a foreign corporation and a
resident of Japan based on its Residence Certificate issued by the
Hakata Tax Office in Japan on January 14, 2009. Panasonic
Communications is located at 1-62, 4-chome, Minoshima Hakata-ku,
Fukuoka, Japan. It is not registered as a corporation or partnership in
the Philippines based on the Certification of Non-Registration of
Corporation/Partnership issued by the Securities and Exchange
Commission ("SEC") on February 11, 2009. On the other
hand, Panasonic Precision Philippines is a domestic corporation
located at Lot C3-8, Carmelray Industrial Park II, Barangay Punta,
Calamba City, Laguna, Philippines. It is originally known as Kyushu
Matsushita Electric Corporation of the Philippines and registered with
the SEC under Company Registration No. A20013276. It is registered
with the Philippine Economic Zone Authority ("PEZA") as an ecozone
export enterprise under Certificate of Registration No. 00-075 issued
on September 8, 2000. It subsequently changed its name
to Panasonic Communications Corporation of the Philippines;
Panasonic Communications Philippines Corporation; Panasonic
System Networks Philippines Corporation; and presently
to Panasonic Precision Devices Philippines Corporation. 2
On September 1, 2007, Panasonic Precision
Philippines and Panasonic Communications entered into
a Manufacturing License Agreement where Panasonic
Communications granted Panasonic Precision Philippines a limited,
non-exclusive and nontransferable sublicense to
reproduce software in machine executable format at its premises and
sell them as an integral part of products under the name
of Panasonic or of other original equipment manufacturers.
The software consists of computer programs with monochrome or
color features and forms an integral part of multi-function products.
The software will be sold to Panasonic Corporation of Japan
(formerly Matsushita Electric Industrial Company Ltd.) or to other
original equipment manufacturers and their customers and
distributors. In consideration, Panasonic Precision Philippines will
pay royalties to Panasonic Communications as follows: ICTHDE
Per
Licensed Software Products
Unit Royalty Fees
Peerless Systems 0.42 percent of
DP-C213/C263/C323/C264/
Corporation suggested retail
price until
1. PEERLESSPrint®XL C353 exhaustion of
prepaid
royalties from
version 2.0/2.1/3.0
Panasonic
PEERLESSPrint®5E and
2. Communications.
5C
PEERLESSPrint®6 0.38 percent of
3.
version suggested retail
price after
XL 2.1, an emulation of exhaustion of the
said
PCL6 royalties.
0.38 percent of
4. Release 3.0 or later of theDP-C265/C305/C405
suggested retail
PEERLESSPageTM price.
Imaging
Operating system with
Phase
3 of the PEERLESS
Memory
Reduction Technology®
(MRT)
Monotype Imaging, Inc. DP-C213/C263/C323/C264/ $20.90
1. Profiles C353
For Japanese:
2. ColorSet CMM DP-C265/C305/C405
$28.90
3. Screens
4. UFST®
5. Licensed Fonts:
Silex Technology, Inc. DP-C213/C263/C323/C264/ ¥980.00
1. STI Embedded Network C353
Software DP-C265/C305/C405
2. Network Protocol Stack
3. Tool
4. Novell NDS Software
Toshiba Information Systems DP-C213/C263/C323/C264/ ¥450.00
Corporation C353
1. Qt Computer Software DP-C265/C305/C405
The royalties are calculated quarterly and payable within thirty
days after receipt of the relevant invoice from Panasonic
Communications. The Agreement took effect on September 1, 2007
and continues in effect indefinitely.
On October 1, 2008, Panasonic Precision
Philippines and Panasonic Communications amended the
Agreement through a Memorandum for the purpose of updating the
list of the licensed software that will be reproduced by Panasonic
Precision Philippines and their corresponding royalties.
Ruling
of tax, as the case may be) shall be preceded by an application filed
at the International Tax Affairs Division ("ITAD") of this Bureau at
least fifteen days before the intended transaction or payment of
income, thus:
"III. Policies:
xxx xxx xxx
preceded by an application by filing BIR Form No.
0901 (Application for Relief from Double Taxation)
with ITAD at least 15 days before the transaction
i.e., payment of dividends, royalties, etc.,
accompanied by supporting documents justifying
it ruled:
been successfully invoked. EcASIC

G.R. No. 168531 on February 18, 2008.
Furthermore, this requirement in RMO 1-2000 is reiterated in
subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG
Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case
No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs.
Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844
and 7166 dated March 29, 2010) and Manila North Tollways
Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No.
7864 dated April 12, 2011).
In view of the foregoing, since the amended Agreement that
gives rise to the royalties has been in effect since September 1, 2007,
but the relevant TTRA was filed only on February 13, 2009, this
Office hereby DENIES relief on all royalties paid by Panasonic
Precision Philippines to Panasonic Communications before February
28, 2009, 3 pursuant to Section III (2) of RMO 1-2000. Accordingly,
said fees shall be subject to income tax under Section 28 (B) (1)
of the National Internal Revenue Code of 1997 ("Tax Code"), as
amended, to wit:
Corporations. —
xxx xxx xxx
On the other hand, the brand license fees paid
to Panasonic on February 28, 2009 and thereafter are subject to
relief under Article 12 of the Philippines-Japan tax treaty, which
provides: TCHEDA
"Article 12
shall not exceed:
a) 15 per cent of the gross amount of the royalties if the
other cases.
xxx xxx xxx
experience."
Under Article 12, royalties arising in the Philippines and paid to
a resident of Japan may be taxed in the Philippines at a rate not to
exceed (a) 15 percent if the royalties are paid in respect of the use of
or the right to use cinematograph films and films or tapes for radio or
television broadcasting, and (b) 10 percent in all other cases. The
term royalties means payments of any kind received as a
literary, artistic or scientific work including cinematograph films and
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.
With respect to the right of Panasonic Precision Philippines to
reproduce software in machine executable format at its premises and
sell them as an integral part of products under the name
of Panasonic or of other original equipment manufacturers, this
transfer of copyright right in the software constitutes
a royalty-generating transaction under Section 5 (a) (i) of Revenue
Memorandum Circular No. 44-2005 (Taxation of Payments
for Software), which provides:
arrangement regarding the use and exploitation of the program.
classified as a transfer of a copyright right if, as a
result of the transaction, a person acquires any
one or more of the rights described below:
purposes of distribution to the public by
sale or other transfer of ownership, or by
rental, lease or lending;
xxx xxx xxx
The determination of whether a transfer of a copyright
right in a software is a sale or exchange of property is made on
the basis of whether, taking into account all facts and
circumstances, there has been a transfer of all substantial
rights in the copyright. A transaction that does not constitute a
sale or exchange because not all substantial rights have been
transferred will be classified as a license
generating royalty income." (Emphasis ours)
Accordingly, since the royalties paid by Panasonic Precision
Philippines to Panasonic Communications are royalties for the use
of copyright and not for cinematograph films and films or tapes for
radio or television broadcasting, such royalties paid to Panasonic
Communications on February 28, 2009 and thereafter shall be
subject to income tax at the rate of 10 percent, pursuant to paragraph
2 (b), Article 12 of the Philippines-Japan tax treaty. CScaDH
Furthermore, under Section 108 (A) of the Tax Code, the said
royalties for the use of copyright in the Philippines are subject to
value-added tax ("VAT"), to wit:
twelve percent (12%). . ."
However, since Panasonic Precision Philippines is registered
with PEZA and entitled to fiscal incentives under Republic Act No.
7916, 5 as amended, the Supreme Court ruled, in Commissioner of
Internal Revenue vs. Seagate Technology (Philippines) (G.R. No.
153866 dated February 11, 2005), that:
and regulations.
charged for the VAT on its sales nor indirectly made to bear, as
added cost to such sales, the equivalent VAT on its
debemus. Where the law does not distinguish, we ought not to
distinguish.
Moreover, the exemption is both express and pervasive
for the following reasons:
First, RA 7916 states that 'no taxes, local and national,
shall be imposed on business establishments operating within
the ecozone.' Since this law does not exclude the VAT from the
prohibition, it is deemed included. Exceptio firmat regulam in
casibus non exceptis. An exception confirms the rule in cases
not excepted; that is, a thing not being excepted must be
regarded as coming within the purview of the general rule.
circumvention of the law. That no VAT shall be imposed directly
upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and
imposed indirectly. Quando aliquid prohibetur ex directo
prohibetur et per obliquum. When anything is prohibited directly,
it is also prohibited indirectly."
Accordingly, since Panasonic Communications, the
nonresident lessor of the intangible property, is not a VAT registered
taxpayer, the royalties paid to it by Panasonic Precision
Philippines shall, for VAT purposes, be treated
as exempt and not subject to zero percent VAT; in either case, no
output VAT is shifted or passed-on to Panasonic Precision
Philippines. 6
insofar as the herein parties are concerned. CSHEAI
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
of Fiscal Evasion with Respect to Taxes on Income.
2.These changes were reflected in Panasonic Precision
Philippines' amendments to its Articles of Incorporation as approved
by the SEC on March 31, 2005 and October 14, 2011, and to its PEZA
Certificate of Registration as approved on February 18, 2008.
3.February 28, 2009 is the fifteenth day of filing the TTRA on February 13,
2009.
5.An Act Providing for the Legal Framework and Mechanism for the Creation,
Operation, Administration, and Coordination of Special Economic
Zones in the Philippines, Creating for This Purpose, The Philippine
Economic Zone Authority (PEZA), and for Other Purposes.
6.Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax
Regulations of 2005), as amended, provides:
"SEC. 4.106-5. Zero-Rated Sales of Goods or Properties. — A zero-rated
sale of goods or properties (by a VAT-registered person) is a taxable
transaction for VAT purposes, but shall not result in any output tax.
However, the input tax on purchases of goods, properties or services
related to such zero-rated sale, shall be available as tax credit or
refund in accordance with these Regulations."
"SEC. 4.109-1. VAT-Exempt Transactions. —
(A) In general. — 'VAT-exempt transactions' refer to the sale of goods or
properties and/or services and the use or lease of properties that is
not subject to VAT (output tax) and the seller is not allowed any tax
credit of VAT (input tax) on purchases.
The person making the exempt sale of goods, properties or services shall
not bill any output tax to his customers because the said transaction is
not subject to VAT."
November 24, 2014
(Business
Profits) Philippines-Netherla
nds tax treaty
Manabat Sanagustin and Co.

and Management Consultants
9th Floor, The KPMG Centre
6787 Ayala Avenue
Makati City
Attention: Atty. Maria Myla S. Maralit

Partner, Tax
Gentlemen :

November 22, 2011 requesting confirmation that service fees paid
by Philippine American Life and General Insurance Company
("Philam Life") to ReMark International BV
("ReMark") (formerly Reinsurers Marketing BV) are exempt from
income tax pursuant to the Convention between the Kingdom of the
Netherlands and the Republic of the Philippines for the Avoidance of
to Taxes on Income ("Philippines-Netherlands tax treaty").
Facts
ReMark is a foreign corporation and a resident of the
Netherlands based on its amended Articles of Association and
Declaration of Residence issued by the Tax Administration of
Rivierenland in Netherlands on July 29, 2011. ReMark is located at
Zuidplein 214, 1077 XV, Amsterdam, Netherlands. It is not registered
as a corporation or partnership in the Philippines based on the
Certification of Non-Registration issued by the Securities and
Exchange Commission on July 21, 2011. On the other hand, Philam
Life is a domestic corporation located at Philamlife Building, United
Nations Avenue, Ermita, Manila, Philippines.
On May 5, 2011, Philam Life and ReMark entered into a Direct
Marketing Agreement where ReMark agreed to perform direct
marketing services to the strategic life assurance joint venture
between Philam Life and the Bank of the Philippine Islands which
was formed on November 27, 2009, namely:
1. Marketing advice including designing and
recommending marketing techniques and customer
propositions;
2. Planning and strategy of marketing campaigns
including distribution strategy and direct
marketing/telemarketing channel development;
3. Design, management and implementation of marketing
campaigns;
4. Assistance and advice on product development, design
and pricing;EHSTDA
5. Recommendation of selected providers (data

processing, printing, telemarketing, etc.);
6. Data enhancement and recommending the appropriate
selection of Philam Life's customers to be included
in the marketing campaign;
7. Production of marketing materials and arranging art
(designing) and copywriting, producing
telemarketing scripts and online communications;
8. Providing marketing campaign information and
conducting post-marketing campaign analysis.
ReMark will provide the necessary materials, facilities and
personnel to perform the services.
In consideration, Philam Life will pay the following fees
to ReMark:
a) Onshore service fee. Equivalent to 6 percent of the
premium received by Philam Life for every policy
issued as a result of the marketing campaigns. This
fee is payable beginning on the second month of the
effectivity of the Agreement.
b) Offshore service fee. Equivalent to 6 percent of the
premium received by Philam Life for every policy
issued as a result of the marketing campaigns. This
fee is payable beginning on the second month of the
effectivity of the Agreement.
c) ReMark Proprietary Policy Administration System
fee (also known as RAPID fee). Equivalent to 5
percent of the premium received by Philam Life for
every policy issued as a result of the marketing
campaigns.
These fees are payable as long as the policies and any
renewals or continuations thereof generate premiums to Philam
Life, and are due within thirty days from receipt of invoice
from ReMark. The Agreement took effect on May 5, 2011 for an initial
period of three years; thereafter, the parties may renew the
Agreement. The Agreement was amended on October 28, 2011.
Based on the Affidavit issued by ReMark on November 1, 2011,
March 22, 2012, June 28, 2013, and March 6, 2014, as of January
2014, ReMark, has sent personnel to the Philippines and provided
services on the following dates:
2011
May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
3-6, 1-3, 1-8, 1-6, 1-2, 3-7, 23-25 6-8

9-14, 6-10, 12-22, 8-10, 5-8, 11-13,
25, 15-18, 25-31 17-19, 13-15, 18-20,
26, 20-24, 23-26, 18-22, 24-27
30, 31 28-30 31 26-28
14 20 26 19 17 15 3 3
2012
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
10-12, 8-10, 1-2, 10-13, 7-10, 4-7, 2-6 1, 21- 4-7, 2-5, 1, 26- 11-14
16-18, 14-17, 19-22, 24-27 21-25 12-15, 24-27 24 10-14, 29-31 29
25-27 28-29 27-30 18-22, 30-31 24-27
25-28
9 9 10 8 9 17 11 5 17 7 5 4
2013
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
8-11, 4-7, 5-8, 1-5, 1-3, 24-28 - - 4-6, 2-4, 18-21 16-18
22-25 19-22 12-15 15-19, 27-28 9-13, 16-18,
29-30 18-20 29-31
8 8 8 12 6 5 0 0 11 9 14 3
2014
Jan.
21-23
3
The aggregate number of days for each twelve-month period

did not exceed 183 days as shown below:
Ending Number Ending Number

Beginning Beginning
Month of Month of
Month Days Month Days
May 2011 Apr 2012 153 Apr 2012 Mar 2013 107
Jun 2011 May 2012 148 May 2012 Apr 2013 111
Jul 2011 Jun 2012 145 Jun 2012 May 2013 108
Aug 2011 Jul 2012 130 Jul 2012 Jun 2013 96
Sep 2011 Aug 2012 116 Aug 2012 Jul 2013 85
Oct 2011 Sep 2012 116 Sep 2012 Aug 2013 80
Nov 2011 Oct 2012 108 Oct 2012 Sep 2013 74
Dec 2011 Nov 2012 110 Nov 2012 Oct 2013 76
Jan 2012 Dec 2012 111 Dec 2012 Nov 2013 75
Feb 2012 Jan 2013 110 Jan 2013 Dec 2013 74
Mar 2012 Feb 2013 109 Feb 2013 Jan 2014 69
Onshore activities performed by ReMark include:

a) Provided business opportunity assessment and
business proposal development; HAICcD
b) Identified and assessed business opportunities with

client by conducting user requirement gathering
workshops with BPI Philam Life's Operations Team
of Underwriting, Policy Administration, Product,
Actuary, Treasury, Accounting, Claims and IT;
c) Conducted product assessment, development and
finalization;
d) Provided recommendation of selected third party
providers including call centers inspection and
selection;
e) Developed critical key performance indicators to
measure the productivity and sales performance of
the team;
f) Conducted site visit to shortlisted third party call center
before proposing the selected call center;
g) Provided recommendations on all templates of reports
to be developed by the selected call center for
all BPI Philam Life's campaigns;
h) Conducted various thorough user-acceptance testing at
selected call center before going live to ensure
smooth transition of the operations;
i) Successfully migrated all campaigns from
Tele-performance to the selected call center;
j) Provided on floor call management training to the call
center manager and supervisors who do not have
much outbound experience;
k) Conducted site visit at Shore Solution and provided
detailed audit report and recommendations to BPI
Philam Life; and
l) Reviewed and proposed changes to the report template
to be developed by third party call center.
Offshore activities performed by ReMark include:
a) Detailed documentation of the user requirements
collected during the workshops conducted in the
onshore activities to be used for planning the
service;
b) Provided marketing advice on the design and
recommended marketing techniques and customer
propositions on the Credit Secure Telemarketing
campaign and the Accidental Protection Plan.
c) Planned the distribution strategy of direct mail and
telemarketing programs and multichannel
developments;
d) Designed, managed and implemented marketing
campaigns;
e) Provided advice on product development, design and
pricing;
f) Compiled and reviewed various third party call centers
in terms of costing and experience in handling
insurance campaign;
g) Provided advice on product development, pricing and
strategies for launching Savings Protector Plan
product targeting at BPI Philam Life depositors'
account with free personal accident provided over
the counter when a customer opens a new deposit
account; aCHDAE
h) Assisted in reviewing the costing and process efficiency

of various courier companies before providing
advice on the shortlisted company for marketing
campaigns;
i) Compiled and reviewed all cancellation data to develop
retention program;
j) Provided advice on the product development, design
and pricing of the Critical Illness Plan;
k) Assisted BPI Philam Life to assess and review other
third party call centers;
l) Conducted post campaign analysis using data analytic
tools such as predictive modeling.
Also, based on the said affidavits, the Direct Marketing
Agreement between Philam Life and ReMark is still in effect, and that,
to date, no payment has been made by Philam Life to ReMark under
the agreement.
Ruling
profits derived in the Philippines by a foreign corporation not engaged
in trade or business is subject to income tax at the rate of 30 percent,
to wit:
Corporations. —
xxx xxx xxx
5(c) and (d) above: Provided, That effective
However, under Section 32 (B) (5) of the Tax Code, such
profits are exempt or partially exempt to the extent required by any
treaty obligation on the Philippines, to wit:
xxx xxx xxx
xxx xxx xxx
For this purpose, paragraph 1, Article 7 of
the Philippines-Netherlands tax treaty provides relief to profits
derived by an enterprise resident of the Netherlands, thus:
"Article 7
Business Profits
1. The profits of an enterprise of one of the States shall be
on business in the other State through a permanent
establishment situated therein. If the enterprise carries
on business as aforesaid, the profits of the enterprise
may be taxed in the other State but only so much of
them as is attributable to that permanent
establishment." DcTaEH
Under this article, the profits may be taxed in the Philippines if

attributable to a permanent establishment which the enterprise has
therein; otherwise, the profits are exempt.
Relative thereto, paragraphs 1 and 2, Article 5 of the tax treaty
defines a permanent establishment as follows:
"Article 5
on.
b) a branch;
c) an office;
d) a factory;
e) a workshop;
f) a mine, quarry or other place of exploration or
extraction of natural resources;
g) a building site or construction or assembly project or
supervisory activities in connection therewith,
where such site, project or activity continues for a
period of more than 183 days;
h) the furnishing of services including consultancy
services by an enterprise through an employee or
other personnel where activities of that nature
continue (for the same or a connected project) for
a period or periods exceeding in the aggregate
183 days within any twelve-month period."
branch, an office, a factory and a workshop. It also includes the
furnishing of services including consultancy services which continues
(for the same or a connected project) for a period or periods
exceeding in the aggregate 183 days within any twelve-month period.
Accordingly, since ReMark is not engaged in trade or business
in the Philippines to which a branch, an office, or other fixed place of
business is necessary, and since it did not furnish services in the
Philippines for more than an aggregate of 183 days within any
twelve-month period, ReMark is not deemed to have a permanent
establishment in the Philippines under paragraphs 1 and 2, Article 5
of the Philippines-Netherlands tax treaty. This being so, the fees
payable to ReMark by Philam Life under the Direct Marketing
Agreement are exempt from income n pursuant to paragraph 1,
Article 7 of the same tax treaty.
On the characterization of the offshore and onshore service
fees as business profits rather than payments for know-how
or royalties, the following commentaries of the Organisation for
Economic Co-operation and Development Model Tax Convention on
Income and on Capital (Condensed Version, July 22,
2010) mention: HEDSCc
"11.1 In the know-how contract, one of the parties

application of the formulas granted to the licensee and that he
does not guarantee the result thereof.
11.2 This type of contract thus differs from contracts
for the provision of services, in which one of the parties
execute work himself for the other party. Payments made
under the latter contracts generally fall under Article 7.
the purpose of making that distinction:
information of the kind described in paragraph 11 that
information.
performance of services would, in the majority of cases,
involve a very much greater level of expenditure by the
supplier in order to perform his contractual obligations.
For instance, the supplier, depending on the nature of
the services to be rendered, may have to incur salaries
and wages for employees engaged in researching,
designing, testing, drawing and other associated
activities or payments to sub-contractors for the
performance of similar services." (Pages 225-226)
sub-contractors for the performance of similar services.
Accordingly, since the Direct Marketing Agreement does not
call for ReMark to supply existing information or reproduce existing
material to Philam Life but to provide services to Philam Life, this is
clearly a contract for the performance of services rather than for the
supply of know-how or other intangible property. Moreover, on
account that ReMark has employed personnel to provide direct
marketing insurance services to Philam Life in the Philippines and
abroad and on a continuous basis, it is certain that ReMark incurred a
greater level of expenditure (such as salaries and wages of these
personnel) to fulfill its contractual obligations to Philam Life. This
being the case, the service fees paid therefor constitute business
profits rather than payments for know-how or royalties. ISDCaT
In the same manner, the RAPID fee for the use of the
RAPID software by Philam Life likewise constitutes business
profits rather than payments for know-how or royalties, as explained
in Section 5 of Revenue Memorandum Circular No.
44-2005 (Taxation of Payments of Software) ("RMC 44-2005") below:
"Section 5. Characterization of
Transactions. — The character of payments received in a
transaction involving the transfer of
computer software depends on the nature of the rights that
the transferee acquires under the particular arrangement
regarding the use and exploitation of the program.
classified as a transfer of copyright right if, as a result of
the transaction, a person acquires any one or more of
the rights described below:
i. The right to make copies of the software for purposes
of distribution to the public by sale or other
transfer of ownership, or by rental, lease or
lending;
ii. The right to prepare derivative computer programs
based upon the copyrighted software;
the software;
iv. any other rights of the copyright owner, the exercise
of which by another without his authority shall
constitute infringement of said copyright;
The determination of whether a transfer of a copyright in
a software is a sale or exchange of property is made on
circumstances, there has been a transfer of all
substantial rights in the copyright. A transaction that
does not constitute a sale or exchange because not all
substantial rights have been transferred will be classified
as a license generating royalty income.
When only copyright rights are transferred, payments made in
consideration thereof are royalties. On the other hand,
when copyright ownership is transferred, payments
made in consideration therefor are business income.
b. Transfer of copyrighted articles. A copyrighted article
incorporating a software includes a copy of
reproduced, or otherwise communicated, either directly
or with the aid of a machine or device. The copy of
the software may be fixed in the magnetic medium of a
floppy disk or a CD-ROM, or in the main memory of hard
drive of a computer, or in any other medium.
If a person acquires a copy of a software but does not acquire
any of the rights described above (or only acquires a de
minimis grant of such rights), and the transaction does
not involve the provision of services or of know-how, the
transfer of the copy of the software is classified solely as
a transfer of a copyrighted article and payments for
which constitute business income." (Underscoring
ours)IDaCcS
RMC 44-2005 distinguishes between payment for the use of

copyright rights in a software and payment for the use of a
copyrighted article embedding a software. Under this circular, if a
person merely acquires a copy of a software but does not acquire
any copyright rights in the software (or only acquires a de
minimis grant of such rights), this transfer is classified as a transfer of
a copyrighted article where payment therefor constitutes business
income or business profits. On the other hand, if a person acquires
copyright rights in a software, such as the right to make copies of
the software for public distribution by sale or other transfer of
ownership, or by rental, lease or lending; the right to prepare
derivative computer programs based upon the software; the right to
make a public performance of the software; and the performance of
any act relating to the software which would otherwise constitute an
infringement without prior authority from the developer or owner of
the software.
On the use of the RAPID software by Philam Life, based on the
agreement, Philam Life is not given the right to exploit the copyright
rights in the software (i.e., the right to make copies for public
distribution; the right to prepare derivative computer programs; the
right to make public performance; and the right to perform other acts
on the software). At most, Philam Life as an end-user automatically
acquires the right to copy the software from a disk containing it or
from a computer disk or a server containing a copy of the same via a
modem or an internet connection onto the servers or hard disks
of Philam Life's computer network, to enable Philam Life to operate
the programs contained in the software, and the right to make a copy
of the software for archival or back-up purposes. This act of copying
is considered a de minimis right and not a right to exploit the
copyright or economic rights in the software, and allowed under
Section 189 of the Intellectual Property Code, 1 to wit:
"Section 189. Reproduction of Computer Program. —
189.1. Notwithstanding the provisions of Section 177, the
reproduction in one (1) backup copy or adaptation of a
computer program shall be permitted, without the
authorization of the author of, or other owner of copyright in, a
computer program, by the lawful owner of that computer
program; Provided, That the copy or adaptation is necessary
for:
(a) The use of the computer program in conjunction with a
computer for the purpose, and to the extent, for which
the computer program has been obtained; and
(b) Archival purposes, and, for the replacement of the lawfully
owned copy of the computer program in the event that
the lawfully obtained copy of the computer program is
lost, destroyed or rendered unusable."
Where Philam Life is not granted authority/right to exploit the
copyright rights in the RAPID software, the RAPID fee payable
to ReMark by Philam Life clearly constitutes as business
profits rather than royalties.
Finally, under Section 108 (A) of the Tax Code, payments
made to ReMark for the use of the RAPID Software and for the
provision of related services are subject to VAT, to wit:
tax to twelve percent (12%) . . . THEcAS
Relative thereto, Philam Life shall withhold VAT on the fees for
services performed in the Philippines at the rate of 12 percent before
remitting them to ReMark. Philam Life shall use BIR Form No. 1600
Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and
its accompanying proof of payment shall serve as documentary
substantiation for Philam Life's claim of input tax on the fees;
otherwise, if it is not a VAT-registered taxpayer, it may treat the VAT
as an asset or expense, whichever is applicable. VAT withheld shall
be remitted within ten days following the end of the month the
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Commissioner
Bureau of Internal Revenue
Footnotes
1.Republic Act No. 8293 entitled An Act Prescribing the Intellectual Property
Code and Establishing the Intellectual Property Office, Providing for
Its Powers and Functions, and for Other Purposes.
Secretary of Finance dated January 31, 2006, as circularized by
Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text
of the Memorandum from Executive Secretary Eduardo R. Ermita
dated January 31, 2006 Approving the Recommendation of the
Secretary of Finance to increase the Value Added Tax Rate from Ten
xxx xxx xxx
(1) Lease or use of properties or property rights owned by non-residents:
and
reinsurance premiums payable to nonresidents; and
Withheld.
agent.
n Note from the Publisher: Copied verbatim from the official copy.
November 11, 2014
Articles 5 and
7, Philippines-New
Zealand tax treaty
Asian Hospital, Inc.

2205 Civic Drive
Filinvest Corporate City
Alabang, Muntinlupa City
Attention: Alexander Cambaling

Tax Manager
Gentlemen :

on December 5, 2012, on behalf of Orion Health Limited
("OHL"), requesting confirmation that the royalties paid to OHL
by Asian Hospital, Inc. ("AHI") are subject to 15 percent preferential
final withholding tax rate pursuant to Article 12 of the Convention
between the Republic of the Philippines and the Government of New
Zealand for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income ("Philippines-New
Zealand tax treaty").
It is represented that OHL is a corporation organized and
existing under the laws of New Zealand with principal address at
Corner of Mary and Enfield Streets, Mt. Eden, 1024, Auckland, New
Zealand, and is a resident of New Zealand for tax purposes based on
the Certificate of Status of Enterprise issued on September 1, 2012
by the Inland Revenue of New Zealand; that it is not registered either
as a corporation or as a partnership in the Philippines per
and Exchange Commission dated August 24, 2012; and that, on the
other hand, AHI is a corporation organized and existing under the
laws of the Philippines, with principal address at 2205 Civic Drive,
Filinvest Corporate City, Alabang, Muntinlupa City.
It is further represented that on April 18, 2012, OHL and AHI
entered into a License, Support and Implement Agreement
("Agreement") whereby OHL grants to AHI a perpetual, non-exclusive,
non-transferable fee-bearing right and license (without the right to
sublicense) to use the Software (Orion Health Hospital Information
System V6.0 sp4) and related materials provided by OHL solely in
object-code form for AHI's internal business use in accordance with
the Software Configuration Restrictions set out in
the Agreement; that in consideration thereof, AHI agreed to pay OHL
the License Fees, the Support Fees, and the Implementation Fees
specified in the Agreement plus any applicable value-added tax (VAT)
other taxes or duties within 30 days of receipts of an invoice from
OHL and in accordance with the commercial terms agreed upon; and
that, based on the telegraphic transfer from the Bank of the Philippine
Islands, royalty payment amounting to USD97,650.00 was made by
AHI to OHL on December 27, 2012.
amended, applies, in general, to royalties derived in the Philippines
by a nonresident foreign corporation. It provides: IacHAE

Corporations. —
tax shall be thirty percent (30%)."
Also, Section 32 (B) (5) of the Tax Code of 1997, as amended,
provides:
xxx xxx xxx
xxx xxx xxx
Government of the Philippines." EaScHT
However, please be informed that Revenue Memorandum

Circular (RMC) No. 44-2005 treats software payments either as
business income, royalties, rental income, or capital gains,
depending on the nature of the transaction out of which such
payments are made. It provides:
character of payments received in a transaction, involving the
program.
classified as a transfer of a copyright right if, as a result of the
described below:
purposes of distribution to the public by
sale or other transfer of ownership, or by
rental, lease or lending; acAIES
ii. The right to prepare derivative computer

programs based upon the
copyrighted software;
the software;
iv. The right to publicly display the computer
program; or
v. any other rights of the copyright owner, the
exercise of which by another without his
authority shall constitute infringement of
said copyright.
right in a software is a sale or exchange of property is made
on the basis of whether, taking into account all facts and
generating royalty income.
When only copyright rights are transferred, payments
made in consideration therefor are royalties. On the other
hand, when copyright ownership is transferred, payments
b. Transfer of copyrighted articles. A copyrighted
article incorporating a software includes a copy of
reproduced, or otherwise communicated, either directly or
with the aid of a machine or device. The copy of
the software may be fixed in the magnetic medium of a floppy
disk or a CD-ROM, or in the main memory or hard drive of a
computer, or in any other medium.
acquire any of the rights described above (or only acquires
a de minimis grant of such rights), and the transaction does
transfer of the copy of the software is classified solely as a
transfer of a copyrighted article and payments for which
constitute business income. caCEDA
xxx xxx xxx"

The fact that what is being transferred to AHI is only a
perpetual, non-exclusive, non-transferable fee-bearing right and
license (without the right to sublicense) to use the Software and there
was no transfer of ownership thereto including pertinent rights
protected under relevant intellectual property laws, Revenue
Memorandum Circular (RMC) 44-2005, Section 5b thereof, will apply
in this case which states that, "If a person acquires a copy of
a software but does not acquire any of the rights described above (or
only acquires a de minimis grant of such rights), and the transaction
does not involve the provision of services or of know-how, the
transfer of the copy of the software is classified solely as a transfer of
a copyrighted article and payments for which constitute business
income."
Thus, payment made by AHI to OHL, being business income
(or business profits), are subject to income tax in the Philippines only
if the income is attributable to a permanent establishment which OHL
has in the Philippines, under paragraph 1, Article 7,
of Philippines-New Zealand tax treaty, to wit:
"Article 7
Business Profits
1. The profits of an enterprise of one of the Contracting States
shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State
through a permanent establishment situated therein. If
the enterprise carries on business as aforesaid, the
profits of the enterprise may be taxed in the other State,
but only so much of them as is attributable to —
a) that permanent establishment; or
b) sales within that other Contracting State of goods or
merchandise of the same or a similar kind as
those being sold, or other business activities of
the same or a similar kind as those being carried
on through that permanent establishment if the
sale or the business activities had been made or
carried on in that way with a view to avoiding
taxation in that other State.
Based on paragraph 1, the profits of an enterprise of New
Zealand shall be taxable only in New Zealand unless the enterprise
carries on business in the Philippines through (a) a permanent
establishment situated therein; and (b) sales within the Philippines of
goods or merchandise of the same or a similar kind as those being
sold, or other business activities of the same or a similar kind as
those being carried on through that permanent establishment if the
sale or the business activities had been made or carried on in that
way with a view to avoiding taxation in New Zealand.
Relative thereto, Article 5 of the same treaty, a permanent
establishment is defined as follows:
"Article 5
2. For the purposes of this Convention, the term "permanent
establishment" means a fixed place of business through
which the business of the enterprise is wholly or partly
carried on.CaEATI
3. The term "permanent establishment" includes especially:

b) a branch;
c) an office;
d) a factory;
e) a workshop;
g) a place of exploration of natural resources;
h) a building site or construction, installation or
assembly project, or supervisory activities in
connection therewith where such site, project or
activity continues for more than six months;
i) premises used as a sales outlet;
j) a warehouse, in relation to a person providing storage
mainly for some other person or persons;
k) a place for the furnishing of services, including
consultancy services by an enterprise through
employees or other personnel where activities of
that nature continue (for the same or a connected
project) within the country for a period or periods
aggregating more than 183 days within any
twelve month period."
Based on the foregoing paragraphs, OHL is deemed to have a
permanent establishment if it has a fixed place of business in the
Philippines through which its business is wholly or partly carried on,
such as, a store or other sales outlet, a branch, an office, a factory, a
workshop, and a warehouse, or if it undertakes activities relating to a
mine, an oil or gas well, a quarry or other place of extraction of
natural resources, or a building site or construction or installation
which continues for more than six months, or a place for the
furnishing of services, including consultancy services by an
enterprise through employees or other personnel where activities of
that nature continue (for the same or a connected project) within the
country for a period or periods aggregating more than 183 days within
any twelve month period. acIASE
Accordingly, since OHL is not engaged in trade or business in

the Philippines to which a fixed place of business such as an office or
a branch is necessary, and since it did not provide the services in the
Philippines for a period or periods aggregating more than six months
within any twelve-month period, OHL is not deemed to have a
permanent establishment with respect to such services. This being
the case, payment made by AHI to OHL on the use for
the Software (Orion Health Hospital Information System V6.0 sp4)
is exempt from income tax, pursuant to Article 7, in relation to Article
5, of the Philippines-New Zealand tax treaty.
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Commissioner
October 10, 2005
Article
12, Philippines-Ne
therlands Tax
Treaty BIR Ruling
No.
DA-ITAD-100-03
Wordtext Systems, Inc.

7/F SEDCCO 1 Building
Legaspi cor. Rada Sts.,
Attention: Ms. Remedies L. Chua

Vice-President/Finance
Gentlemen :
This refers to your letter dated January 12, 2005,

requesting the availment of the 15% tax treaty rate on
royalties arising from payments made by Wordtext Systems,
Inc. (Wordtext) to Macromedia Netherlands B.V.
(Macromedia), pursuant to Article 12 paragraph 2(b) of
It is represented that Macromedia is a nonresident
foreign corporation with office address at Zonnebaan 45,
3542 EB Utrecht, The Netherlands and is a resident of the
Netherlands within the meaning of Article 4 of
the Philippines-Netherlands tax treaty, as certified in the
Declaration of Residence dated June 15, 2004 issued by
the Tax and Customs Administration of The Netherlands;
that it is not registered either as a corporation or as a
partnership licensed to engage in trade or business in the
Philippines per certification issued by the Securities and
Exchange Commission dated January 5, 2005; that
Wordtext is a corporation organized and existing under the
laws of the Philippines with principal address at 7/F
SEDCCO 1 Building, Legaspi corner Rada Sts., Legaspi
Village, Makati City; that on August 19, 2004, Macromedia
and Wordtext entered into an
International Software Distribution Agreement (Agreement)
wherein Wordtext was licensed by Macromedia as its
non-exclusive distributor of the latter's software products
(Products) in the Philippines; that under the Agreement,
Wordtext may distribute the Products only in the Philippines
solely through retail dealers located and taking delivery of
Products within the Philippines, which retail dealers shall
license the use of the Products only under the terms and
conditions of the End-user Software License Agreement
supplied with the Products, and that Macromedia and
Wordtext are each independent entities and neither party
shall be, nor represent itself to be, a franchisor, franchisee,
joint venturer, partner, master, servant, principal, agent or
legal representative of the other party for any purpose
whatsoever; that Macromedia will charge Wordtext for the
products according to its price list in effect at the time of the
order, the price list will be amended upon the addition or
discontinuance of Products or revision of prices for
Products, and that the Agreement shall be effective as of
August 19, 2004 and shall continue to be in force until
terminated by either party. EAaHTI
In reply, please be informed that Article 12 of

the Philippines-Netherlands tax treaty provides that:
"Article 12
"Royalties"
"1. Royalties arising in one of the States and
paid to a resident of the other State may be taxed
in that other State.
"2. However, such royalties may also be
taxed in the 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
"a) 10 per cent of the gross
amount of the royalties where the
royalties are paid by an enterprise
registered, and engaged in preferred
areas of activities in that State; and
"b) 15 per cent of the gross
amount of the royalties in all other
cases.
"xxx xxx xxx"
Based on the abovecited provisions, royalties arising
from sources within the Philippines and derived by a
resident of the Netherlands shall be subject to the following
preferential tax rates: (a) a rate not exceeding 10 percent of
the gross amount of the royalties, where the royalties are
paid by an enterprise registered and engaged in preferred
areas of activities and (b) 15 percent of the gross amount of
the royalties in all other cases.
Such being the case, and since Wordtext is not a
corporation registered with the Philippine Board of
Investments which is engaged in preferred areas of
activities, this Office is of the opinion and so holds that
the royalty fees paid by Wordtext to Macromedia pursuant
to their International Software Distribution Agreement shall
be subject to income tax at a rate of 15 percent, based on
the gross amount thereof. (BIR Ruling No.
DA-ITAD-100-03 dated July 16, 2003)
Finally, the said royalty fees by Wordtext to
Macromedia are subject to the 10% value-added tax (VAT)
pursuant to Section 108 of the Tax Code of 1997.
Accordingly, Wordtext, being the resident withholding agent
and payor in control of the payment shall be responsible for
the withholding of the 10% VAT on such royalty fees before
remitting any payment to Macromedia. In remitting the VAT
withheld, Wordtext shall use BIR Form No. 1600 (Monthly
Remittance Return of Value-Added Tax and Other
Percentage Taxes Withheld). The duly filed BIR Form No.
1600 and proof of payment thereof shall serve as
documentary substantiation for the claim of input tax by
Wordtext upon filing its own VAT Return, if it is a
VAT-registered taxpayer. In case Wordtext is a non-VAT
registered taxpayer, the passed-on VAT withheld shall form
part of the cost of the service purchased which may be
treated as an "expense" or an "asset", whichever is
applicable. In addition, Wordtext is required to issue the
Certificate of Final Tax Withheld at Source (BIR Form No.
2306) in quadruplicate, the first three copies thereof to be
given to Macromedia upon its request and the fourth copy
to be retained by Wordtext as its file copy. [Section 4 &
6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR
No. 14-2002] ECaAHS
This ruling is issued on the basis of the foregoing

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.
Very truly yours,
(SGD.) JAMES H.
ROLDAN
Legal Service
First document
 6
 7
 8
||| (ITAD Ruling No. 116-05, [October 10, 2005])
May 21, 2013

Articles 5 and
7, Philippines-Australia tax
treaty; Sections 28 (B) (1),
32 (B) (5), 108 (A) (1) and (3)
of the Tax Code of 1997, as
amended
Mr. Alfonso S. Sta. Clara, CPA

92 P. Banzon Street, BF Homes
Sucat, Parañaque City
Sir :

December 29, 2011, requesting for confirmation that the income
payments by Bangko Sentral ng Pilipinas ("BSP") to CCK Financial
Solutions Ltd. ("CCK-Australia") for the purchase of
certain software from and the provision of related services are
exempt from income tax pursuant to Article 7 (Business Profits) in
relation to Article 5 (Permanent Establishment) of the Agreement
between the Government of the Republic of the Philippines and the
Government of Australia for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on
Income ("Philippines-Australia tax treaty").
ICAcTa
It is represented that CCK-Australia is a non-resident foreign

corporation, organized and existing under the laws of Australia and a
resident thereof with principal business address at Level 3, 12 Street
Geroges Terrace Perth WA 6000 as evidenced by the Certificate of
Residency issued by the Delegate of the Deputy Commissioner of the
Australian Taxation Office on November 25, 2011;
that CCK-Australia is not registered either as a corporation or
Non-Registration of Company issued by the Philippine Securities and
Exchange Commission on December 19, 2011; that on the other
hand, BSP is the central bank of the Republic of the Philippines with
principal business address at A. Mabini Street, Malate, Manila.
It is further represented that on January 16,
2012, CCK-Australia and BSP entered into a Software License
Agreement ("Agreement") whereby CCK-Australia grants to BSP the
right to use the Software Package 1 in connection with its existing
business, or in connection with the existing business of a related
party of BSP, and authorize a related party to use
the Software Package solely for its existing business or the existing
business of BSP or another related party of BSP for the License
Term 2 and in accordance with the Agreement; that BSP must not
make any copies of the Software Package except in machine
readable form and only for the purposes of: (a) archive, emergency
restart or back up of the Software Product, (b) testing the software,
and (c) replacing a defective copy or verifying a programming error in
the Software Product, and BSP must ensure that only the minimum
number of copies necessary for these purposes exist at any one time;
that the initial number of users shall be 30 concurrent users; that for
and in consideration of the License granted, BSP shall
pay CCK-Australia the following: (1) Basic Fee of PhP33,750,000; (2)
Maintenance Fee of PhP7,470,000 (being PhP6,750,000 in respect
of the Basic Fee and PhP720,000 in respect of interfaces) if BSP
elects to subscribe to the Gold Level of Maintenance or
PhP8,217,000 (being P7,425,000 in respect of the Basic Fee and
PhP792,000 in respect of interfaces if BSP elects to subscribe to the
Platinum level of Maintenance; that the additional user fee in respect
of users of the software product exceeding the initial number of users;
that all sums payable by BSP to CCK-Australia must be paid in full;
that based on the Certifications issued by CCK and BSP on May 29,
2012 and May 25, 2012, respectively, payments were to be made
based on the following schedule:
Activity Payment Date
Kick-off May 25, 2012
Business Review June 8, 2012
Guava Database Build June 15, 2012
User Training June 22, 2012
User Acceptance Testing September 15, 2012
Data Migration December 15, 2012
Live Date February 15, 2013
On-site Support Post LiveMay 15, 2013
and that the actual payment was made on December 21, 2012
for the initial or partial payment for the services rendered based on
the Certification issued by the authorized representative of
CCK-Australia on March 22, 2013.
It is further represented that the following employees
of CCK-Australia were sent to the Philippines to furnish services
pursuant to the Agreement: TaDIHc
Name January February March April May June

2012 2012 2012 2012 2012 2012
Jennifer 3-311-25 and 27 1-31 10-30 1-31 1-30
Treadwell
Helen 14, 15, 26, 16-2114-17 and 12-15
Glastras 27, 28 21-22
Mukhtiar 5-15 27-31 1-8
Singh
Frank
Cavaleri
Stephen 6-17
Platell
Jay Khaw 19-28 25-30 21-31 1-2
–––––– –––––– ––––– ––––– ––––– ––––
Total 29 28 31 21 31 30
====== ====== ===== ===== ===== ====
Grand Total 170
Financial Year 2012
July 1, 2012 to June 30, 2013
Augus September October November December

Name July Jan Feb
t
2012 2012 2012 2012 2012 2012 2013 2013
1-19 4-6
Jennifer 1-30 1-13 and 1-25 4-28 3-21 2-24
and and
Treadwel
24-31 23-30 11-14
l
1-2
Helen 9-12, 10-13 8-11 6-8 3-6 3-4 11-14
and
16-17,
Glastras 13-15
30
Mukhtiar
Singh
Frank 2-9 7-17
Cavaleri
Stephen 30 1-9 20-24
Platell
Jay
5-30 1-8 and 1-14 11-28 4-21
Khaw
23-30
––––– ––––– ––––– ––––– –––– ––––– ––––– –––––
Total 27 30 21 25 25 19 23 7
==== ==== ====
===== ===== ===== ===== ======
= = =
Grand
177
Total
based on the Certification of duration issued by the authorized
representative of CCK-Australia. Clearly, the services performed do
not exceed an aggregate period of six months in any taxable year or
year of income as the duration of the services performed in the
Philippines pursuant to the Agreement are 170 days for the first
taxable year and 177 days for the second taxable year.
It is finally represented that the issue or transaction subject of
this request is not subject of investigation, on-going audit,
administrative protest, claims for refund or issuance of a tax credit
certificate, collection proceedings, or judicial appeal, based on the
Certification issued by the Director of BSP on December 22, 2011.
In reply, please be informed that
concerning software payments, Revenue Memorandum Circular
(RMC) No. 44-2005 3 provides the tax treatment
of software payments, either as (1) business income, (2) royalties, (3)
rental income, or (4) capital gains, depending on the nature of the
transaction out of which such payments are
made. Software payments are treated as royalties only if the
transaction does not constitute a sale or exchange and not all
substantial rights in the software have been transferred, but are
merely for the transfer of copyright rights in the software. It provides:
program. AETcSa

classified as a transfer of a copyright right if as a result of the
described below:
of distribution to the public by sale or other
transfer of ownership, or by rental, lease or
lending;
the software;
iv. The right to publicly display the computer program; or
v. Any other rights of the copyright owner, the exercise
of which by another without his authority shall
constitute infringement of said copyright.
right in a software is a sale or exchange of property is made on
made in consideration therefor are royalties. On the other hand,
when copyright ownership is transferred, payments made in
consideration therefor are business income.
b. Transfer of copyrighted articles. A copyrighted article
incorporating a software includes a copy of the software from
which the work can be perceived, reproduced, or otherwise
communicated, either directly or with the aid of a machine or
device. The copy of the software may be fixed in the magnetic
medium of a floppy disk or a CD-ROM, or in the main memory
or hard drive of a computer, or in any other medium.
a de minimis grant of such rights), and the transaction does not
involve the provision of services or of know-how, the transfer of
the copy of the software is classified solely as a transfer of a
copyrighted article and payments for which constitute business
income.
xxx xxx xxx"
Under the provisions of the above-quoted Circular, license fee
is treated as business income (or business profits) and taxable as
such, as described above. Accordingly, the license fees paid or
payable to CCK-Australia by BSP for the latter's use of the
Licensed Software, are subject to income tax only if the same are
attributable to a permanent establishment which CCK-Australia has
in the Philippines, under paragraph 1, Article 7 in relation to Article 5
of the Philippines-Australia tax treaty, to wit:IScaAE
"Article 7
Business Profits
1. The profits of an enterprise of one of the Contracting
States shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise
carries on business as aforesaid, the profits of the enterprise
may be taxed in the other State, but only so much of them as is
attributable to —
(a) that permanent establishment; or
(b) sales within that other Contracting State of
goods or merchandise of the same or a similar
kind as those sold, or other business activities
of the same or a similar kind as those carried on
through that permanent establishment if the
sale or the business activities had been made
or carried on in that way with a view to avoiding
taxation in that other State.
xxx xxx xxx"
"Article 5
1. For the purposes of this Agreement, the term
'permanent establishment' means a fixed place of business
through which the business of an enterprise is wholly or partly
carried on.
2 The term 'permanent establishment' shall include
especially —
xxx xxx xxx"
(k) a place in one of the Contracting States
through which an enterprise of the other
Contracting State furnishes services, including
consultancy services, for a period or periods
aggregating more than six months in any
taxable year or year of income, as the case may
be, in relation to a particular project, or to any
project connected therewith.
xxx xxx xxx"
Based on the foregoing, in order for CCK-Australia to be
considered to have a permanent establishment to which said
business profit may be attributed, it must satisfy the following
conditions:SCaTAc
— the existence of a "place of business", i.e., a facility

such as premises or, in certain instances,
machinery or equipment;
— this place of business must be "fixed", i.e., it must be
established at a distinct place with a certain degree
of permanence;
— the carrying on of the business of the enterprise
through this fixed place of business. This means
usually that persons who, in one way or another, are
dependent on the enterprise (personnel) conduct
the business of the enterprise in the State in which
the fixed place is situated." 4
Since it appears, based on the Certificate issued by CCK
Financial Solutions (Philippines), Inc., that the fees subject of this
application are not effectively connected with therewith, CCK
Financial Solutions (Philippines), Inc. cannot be deemed as CCK's
permanent establishment to which said business profit may be
attributed. Thus, for as long as CCK-Australia is deemed not to have
a permanent establishment in the Philippines to which its profits may
be attributable, the subject fees constituting business profits shall be
exempt from income tax and consequently from withholding tax.
As regards the maintenance fee and other service fees paid in
relation to the Agreement which are represented to be rendered
outside the Philippines and in cases of the services rendered in the
Philippines by employees of CCK-Australia, for as long as such stay
in the Philippines will not exceed an aggregate period of six (6)
months, Article 7 in relation to Article 5 of the Philippines-Australia tax
treaty shall apply. In this case, inasmuch the duration of services
performed in the Philippines pursuant to the Agreement are 170 days
for the first financial year and 177 days for the second financial year,
based on the relevant Certification issued by the authorized
representative of CCK-Australia, then CCK-Australia is deemed not
to have a permanent establishment in the Philippines. IAEcaH
Finally, fees paid for the services of CCK-Australia are subject

to value-added tax (VAT) at the rate of 12 percent pursuant to
Section 108 of the Tax Code of 1997. Accordingly, BSP being the
resident withholding agent and payor in control of the payments, shall
be responsible for the withholding of the final VAT before respectively
making any payment to CCK-Australia. In remitting the VAT withheld,
BSP shall use BIR Form No. 1600 (Monthly Remittance Return of
Value-Added Tax and Other Percentage Taxes Withheld). The duly
filed BIR Form 1600 and proof of payment thereof shall serve as
documentary substantiation for the claim of input tax
by CCK-Australia upon filing its own VAT Return, if it is a
VAT-registered taxpayer. In case BSP is a non-VAT registered
taxpayer, the passed-on VAT withheld shall form part of the cost of
the service purchased which may be treated as "expense" or "asset",
whichever is applicable. In addition, BSP is required to issue the
respective Certificate of Final Tax Withheld at Source (BIR Form
2306) in quadruplicate upon request of BSP, the first three copies
thereof to be given to CCK-Australia and the fourth copy to be
retained by BSP as its file copy. [Sections 4 & 6, Revenue
Regulations (RR) No. 4-2002; Section 3 RR No. 8-2002; Section 7
of RR No. 14-2002]
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
1.Includes Guava Suite Treasury, System incorporating Guava Dealer,
Guava Risk, Guava Ops and Guava Reporter, Money Market
Module, Fixed Income Module, Foreign Exchange Module, and
Derivative Module.
2.Means the period from the License Commencement Date until the
License is terminated.
3.Entitled, "Taxation of Payments for Software" dated September 1, 2005.
4.Organization for Economic Cooperation and Development (OECD), 2005
edition, paragraph 2, pages 85-91.
||| (ITAD BIR Ruling No. 141-13, [May 21, 2013])
October 24, 2012
Article 12
(Royalties) Philippines-Ge
rmany tax treaty
Alba Romeo and Co.

7th Floor, Multinational Bancorporation Centre
6805 Ayala Avenue
Makati City
Attention: Atty. Prackie Jay T. Acaylar

Senior Tax and Legal Consultant
Gentlemen :

on March 14, 2012 requesting confirmation that royalties paid
by Software AG (Philippines), Inc.
("Software Philippines") to Software AG ("Software") are subject to
income tax at the rate of 10 percent pursuant to the Agreement
between the Republic of the Philippines and the Federal Republic of
Germany for the Avoidance of Double Taxation with Respect to
Taxes on Income and Capital ("Philippines-Germany tax treaty").
Facts
Software is a foreign corporation and a resident of Germany
based on its amended Articles and Memoranda of Association and on
the Certificate of Residence issued by the German tax authorities on
November 4, 2011. Software is located at Uhlandstrabe 12,
Darmstadt, Germany. It is not registered as a corporation or
Commission on February 7, 2012. On the other
hand, Software Philippines is a domestic corporation located at Unit
2202-2204, Robinsons-Equitable PCI Bank Tower, ADB Avenue
corner Poveda Street, Barangay San Antonio, Pasig City, Philippines.
On January 1,
2008, Software Philippines and Software entered into a Cooperation
Agreement where Software grants Software Philippines an exclusive
right to grant sublicenses in the Philippines to use software products
belonging to and developed by Software (or its subsidiaries) and to
provide maintenance services on these products. Maintenance refers
to the provision of new versions, new releases and periodic fixes and
error corrections for the software products.
Also, Software grants Software Philippines the right to use its
trademarks, service marks and trade names identifying or used in
connection with the software products or its business. In
consideration, Software Philippines will pay royalties
to Software based on the net turnover of the software products and
the maintenance services, to wit: HEIcDT
SAP
Category of Product Royalty on Royalty on
Code
License Maintenance
Software's Global Product 01 30 percent 40 percent
Product is transferred into Software's

04 0 0
Global
Product based on a board Resolution (for
the first
two years after transfer of IPR)
Product is transferred
05 30 percent 40 percent
into Software's Global
Product based on a board Resolution (for
the third
year and onwards)
Third party product if not determined as 03 0 0

Software's Global Product
Local product and local third party product 02 0 0

Product is sold by a Software's subsidiary 06 25 percent 35 percent
Product sold by a subsidiary is transferred 04 10 percent 10 percent
into
Software's Global Product based on a
board
Resolution (for the first two years after
transfer
of IPR)
Product sold by a subsidiary is transferred

05 0 0
into
Software's Global Product based on a
board
Resolution (for the third year and onwards)
The royalties are computed monthly and payable within thirty
days after receipt of the relevant invoice from Software. The
Agreement took effect on January 1, 2008 and will remain in effect for
an initial period of one year; thereafter, the Agreement will be
automatically renewed for successive periods of one year. The
Agreement complies with the provisions of the Intellectual Property
Code on voluntary licensing under Certificate of Compliance No.
5-2008-00072 issued by the Intellectual Property Office on July 31,
2007, valid on January 1 to December 31, 2008.
The Agreement was amended on January 1, 2009 for the
primary purpose of renewing the Agreement and modifying the
amount of service fees payable by Software Philippines to Software.
The amended Agreement likewise complies with the provisions of
the Intellectual Property Code on voluntary licensing under Certificate
of Compliance No. 5-2010-00004 issued on April 19, 2010, valid on
January 1 to December 31, 2010, and under Certificate of
Compliance No. 5-2010-00079 issued on December 3, 2010, valid on
January 1 to December 31, 2010.
Ruling
accrued on November 4, 2010 and thereafter, any availment of tax
treaty relief (exemption from income tax or reduction of tax) shall
Division ("ITAD") of this Bureau before the intended transaction or
payment of income, to wit: HADTEC
"SEC. 14. When and Where to File the TTRA. — All tax
treaty relief applications (updated BIR Forms No. 0901-D,
0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C)
improperly filed.
Failure to properly file the TTRA with ITAD within the period
prescribed herein shall have the effect of disqualifying the
TTRA under this RMO." (Emphasis ours)
In relation thereto, Revenue Memorandum Order No.
1-00 (Procedures for Processing Tax Treaty Relief Application)
("RMO 1-2000"), which covers income derived or accrued before
November 4, 2010, provides that any availment of relief shall
be preceded by an application filed at least fifteen days before the
intended transaction or payment of income, to wit:
"III. Policies:
xxx xxx xxx
2. Any availment of the tax treaty relief shall be preceded by an
application by filing BIR Form No. 0901 (Application for
Relief from Double Taxation) with ITAD at least 15 days
before the transaction i.e., payment of dividends,
royalties, etc., accompanied by supporting documents
justifying the relief . . ." (Emphasis ours)
it ruled:
TcAECH
"However, it must be remembered that a foreign corporation

wishing to avail of the benefits of the tax treaty should invoke
the provisions of the tax treaty and prove that indeed the
provisions of the tax treaty applies to it, before the benefits may
be extended to such corporation. In other words, a resident or
non-resident foreign corporation shall be taxed according to the
provisions of the National Internal Revenue Code, unless it is
shown that the treaty provisions apply to the said corporation,
and that, in cases the same are applicable, the option to avail
of the tax benefits under the tax treaty has been successfully
invoked.
Under Revenue Memorandum Order 01-2000 of the Bureau of
Internal Revenue, it is provided that the availment of a tax
treaty provision must be preceded by an application for a tax
treaty relief with its International Tax Affairs Division (ITAD).
The Court notes that nowhere in the records of the case was it
shown that petitioner indeed took the liberty of properly
G.R. No. 168531 on February 18, 2008.
Revenue (C.T.A. Case No. 7864 dated April 12, 2011). cICHTD
In view of the foregoing, since the amended Agreement that

gives rise to the royalties has been in effect since January 1, 2008,
but the TTRA for this purpose was filed only on March 14, 2012, this
Office hereby DENIES relief on all royalties paid
by Software Philippines to Software on and before March 14, 2012,
pursuant to Section 14 of RMO 72-2010 and Section III (2) of RMO
1-2000. Accordingly, said royalties shall be subject to income tax
under Section 28 (B) (1) of the National Internal Revenue Code of
1997 ("Tax Code"), as amended, to wit:
"SEC. 28. Rates of Income Tax on Foreign Corporations. —
xxx xxx xxx
5(c) and (d) above: Provided, That effective
On the other hand, royalties paid to Software on March 15,
2012 and thereafter are subject to a reduced rate of income tax under
Article 12 of the Philippines-Germany tax treaty, which provides:
"Article 12
ROYALTIES
that other State.
the law of that State, but the tax so charged shall not
exceed:
broadcasting, or
or scientific experience. DHaEAS

by the Philippine competent authorities.
television or broadcasting, any patent, trade mark,
the use of, or the right to use, industrial, commercial, or
industrial, commercial or scientific experience."
Under Article 12, royalties arising in the Philippines and paid to
a resident of Germany may be taxed in the Philippines at a rate not to
exceed (a) 15 percent if the royalties are in respect of the use of, or
including cinematograph films or tapes for television or broadcasting,
and (b) 10 percent if the royalties are in respect of the use of, or the
right to use, patent, trade mark, design or model, plan, secret formula
or process, or from the use of, or the right to use, industrial,
industrial, commercial or scientific experience
("know-how"), provided the contract giving rise to the royalties has
been approved by the Philippine competent authorities.
Accordingly, since the amended Agreement
grants Software Philippines the right to use Software's trademarks,
service marks and trade names identifying or used in connection
with software products belonging to and developed by Software (or
its subsidiaries) and which will be sublicensed
by Software Philippines to third parties, payments arising therefrom
constitutes royalties for the use of trademark. Moreover, since the
Agreement has been approved by the Intellectual Property Office of
the Philippines, such royalties paid
by Software Philippines to Software on March 15, 2012 and
thereafter shall be subject to income tax at the rate of 10 percent,
under paragraph 2 (b), Article 12 of the Philippines-Germany tax
treaty.
Finally, under Section 108 (A) of Tax Code, the royalties in
question, being payments for the use of trademark know-how in the
Philippines, are subject to value-added tax ("VAT"), to wit:
"SEC. 108. Value-added Tax on Sale of Services and Use or
Lease of Properties. —
twelve percent (12%) . . ." CaHcET
Relative thereto, Software Philippines shall withhold VAT on

the royalties at the rate of 12 percent before remitting them
to Software. Software Philippines shall use BIR Form No. 1600
Percentage Taxes Withheld). If it is a VAT-registered taxpayer, the
duly filed BIR Form No. 1600 and its accompanying proof of payment
shall serve as documentary substantiation for Software Philippines'
claim of input tax on the royalties; otherwise, it may treat such VAT as
an asset or expense, whichever is applicable. VAT withheld shall be
remitted within ten days following the end of the month the
Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Footnotes
xxx xxx xxx
and
Withheld.
agent.
November 4, 2014
Articles 5 and
Tax Treaty
Du-Baladad and Associates

20th Floor, Chatham House, Rufino corner Valero Streets
Salcedo Village, Makati City
Attention: Atty. Benedicta Du-Baladad
Gentlemen :
This refers to your tax treaty relief application filed on July 19,
2012, requesting confirmation that the income payments by Bank of
Philippine Islands ("BPI") to Softplus Pte. Ltd. ("Softplus") are subject
to the preferential rate pursuant to the Convention between the
Republic of the Philippines and the Republic of Singapore for the
with Respect to Taxes on Income. ("Philippines-Singapore tax
treaty").
It is represented that Softplus is a resident of Singapore with
principal address at 190 Middle Road #19-05, Singapore based on
the Certificate of Residence issued by the Assistant Commissioner of
the Corporate Tax Division on July 20, 2012; that Softplus is not
Philippines, as shown in the Certification of Non-Registration of
Company dated May 30, 2012 issued by the Securities and
Exchange Commission; and that on the other hand, BPI is a domestic
banking institution with principal address at BPI Head Office Building,
Ayala Avenue corner Paseo de Roxas, Makati City.
It is further represented that on May 29, 2012; Softplus and an
authorized distributor of cfSOFTWARE (as licensor) and BPI (as user)
entered into a Proprietary Software Perpetual License Agreement
("Agreement"), whereby Softplus grants to BPI a non-transferable
and non-exclusive perpetual license to use the proprietary
computer software, pcMainframe, on the central processing unit
located at the BPI Makati Office; that the products may only be used
for, by and on behalf of BPI, and only (i) on data owned by BPI, (ii) for
BPI's internal purposes and (iii) at the installation site and on the
designated CPUs specified; that the simultaneous use of the
products at any other site or on any other CPU is prohibited, unless
expressly contracted for between Softplus and BPI;
that Softplus agrees to maintain the products in an operable condition
according to the current published specifications for the products for
the initial period without additional charge to BPI; that Softplus will
furnish the product in machine-readable object code form and provide
documentation to BPI containing detailed specifications for the
installation and use of the product; that for and in consideration of the
said license, BPI shall pay Softplus maintenance fee of
US$20,794.50 per year and license fee in the amount of US$20,250;
that all amounts payable under the Agreement, including any taxes or
other charges described below, are invoiced by Softplus and are to
be paid in full by BPI within ten days after receipt of the invoice
therefor; that BPI shall pay a late payment charge of 1.5% per month,
or the maximum rate permitted by applicable law, whichever is less,
on any unpaid amount for each calendar month or fraction thereof
that any payment to Softplus in arrears; that the services to be
performed by Softplus under the Agreement are not to be performed
in the Philippines pursuant to the Certification issued by the Vice
President of BPI dated June 22, 2012; and that as of July 13, 2012,
no payment has been made with respect to the maintenance fee
agreed upon in the Agreement based on the Certification issued by
the Vice President of BPI on even date. cCaEDA
It is finally represented that the payments subject of this ruling

proceedings, or judicial appeal, based on the Sworn Statement
issued by the Vice President of BPI on May 14, 2012.
amended, applies, in general, to income derived in the Philippines by
a non-resident foreign corporation:
Corporations. —
xxx xxx xxx
5(c) and (d): n Provided, That effective January 1,
percent (30%).
xxx xxx xxx"
amended, provides:
xxx xxx xxx
xxx xxx xxx
Government of the Philippines. DaEATc
xxx xxx xxx"
The Bureau of Internal Revenue has issued two Revenue
Memorandum Circulars (RMC) that govern the taxation
of software payments. The first Circular (RMC 77-2003)
covers software payments made as of November 18, 2003 and until
the effectivity of the second Circular and generally
treats software payments as royalties. It provides —
"Definition of Royalties Includes Payments for the Use
of Software:
The term 'royalties' as generally used means payment
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, or films or tapes used 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. The term 'use' as contained herein shall
include the reselling or distribution of software.
Software is generally assimilated as a literary, artistic
or scientific work protected by the copyright laws of various
countries including the Philippines; thus payments in
consideration for the use of, or the right to use, a copy or a
copyrighted article relating to software are generally
royalties."
On the other hand, the second Circular (RMC 44-2005) covers
payments made as of September 8, 2005 and onwards and
substantially amends the first Circular by treating software payments
either as business income, royalties, rental income, or capital gains,
depending on the nature of the transaction out of which such
payments are made. It provides:
program. cCSDTI
a. Transfer of copyright rights. (emphasis supplied) A

transfer of software is classified as a transfer of a copyright
right if, as a result of the transaction, a person acquires any
one or more of the rights described below:
of distribution to the public by sale or other transfer of
ownership, or by rental lease or lending;
the software;
iv. The right to publicly display the computer program; or
v. any other rights of the copyright owner, the exercise
of which by another without his authority shall constitute
infringement of said copyright.
right in a software is a sale or exchange of property is made
on the basis of whether, taking into account all facts and
made in consideration therefor are royalties. On the other
hand, when copyright ownership is transferred, payments
b. Transfer of copyrighted articles. (emphasis
supplied) A copyrighted article incorporating
a software includes a copy of the software from which the
work can be perceived, reproduced, or otherwise
communicated, either directly or with the aid of a machine or
device. The copy of the software may be fixed in the
magnetic medium of a floppy disk or a CD-ROM, or in the
main memory or hard drive of a computer, or in any other
medium. HcACST

a de minimis grant of such rights), and the transaction does
transfer of the copy of the software is classified solely as a
transfer of a copyrighted article and payments for which
constitute business income.
c. After-sales services. Contracts for the use
of software are often accompanied with the provision of
services (e.g., installation, maintenance, and customization of
the software) by personnel of the relevant foreign
licensor/owner of the relevant local subsidiary, reseller, and
distributor. Payments as consideration for after-sales service
in a mixed contract are not royalties alone, but will include
income from services. The appropriate course to take with
such a contract is, in principle, to break down, on the basis of
the information contained in the contract or by means of a
reasonable apportionment, the whole amount of the
stipulated payments according to the various parts of what is
being provided under the contract, and then to apply to each
part of it so determined the taxation treatment proper thereto.
Thus, the part of the payments representing the use of
the software will be treated as royalties and taxable as such
and the other part of the payments representing the provision
of services will be treated as income from services and
taxable as such.
If, however, one part of what is being provided
constitutes by far the principal purpose of the contract and the
other parts stipulated therein are only of an ancillary and
largely unimportant character, then the treatment applicable
to the principal part should generally be applied to the whole
amount of the consideration.
xxx xxx xxx"
The substantial difference between the two Circulars lies in the
characterization of payment from the purchase of a copyrighted
article incorporating a software. Under the first Circular, payment for
the purchase of any software is treated as royalties and taxable as
such, while under the second Circular, the payment for software may
be treated as business income (or business profits) and taxable as
such, depending on circumstances as described above.
Since what is being transferred to BPI is only a copy of
a software for its use, and since there will be no transfer of ownership
thereto including pertinent rights protected under relevant intellectual
property laws, Revenue Memorandum Circular (RMC) 44-2005,
particularly the Section 5b thereof which states that "If a person
acquires a copy of a software but does not acquire any of the rights
described above (or only acquires a de minimis grant of such rights),
and the transaction does not involve the provision of services or of
know-how, the transfer of the copy of the software is classified solely
as a transfer of a copyrighted article and payments for which
constitute business income" will apply to the instant case. TSacAE
As you have invoked the provisions of

the Philippines-Singapore tax treaty, we apply Article 7 and, in
relation thereto, Article 5 of the same tax treaty on the subject fees,
which provide:
"Article 7
Business Profits
attributable to that permanent establishment.
xxx xxx xxx"
"Article 5
on.
not limited to:
b) A branch;
c) An office;
d) A store or other sales outlet;
e) A factory;
f) A workshop;
resources;
days; and
aggregating more than 183 days.
xxx xxx xxx." (Underscoring supplied)
Based on the aforequoted, the profits of a Singapore enterprise
shall be taxable only in Singapore unless such enterprise carries on
business in the Philippines through a permanent establishment
situated therein. If the Singapore enterprise carries on business as
aforesaid, the profits of such enterprise may be taxed in the
Philippines but only so much of them as is attributable to that
permanent establishment.
Applying this to the instant case, the fees received
by Softplus from BPI for the services pursuant to the Agreement,
shall be taxable in the Philippines only if it has a permanent
establishment in the Philippines in connection with the activities
giving rise to such income. Inasmuch as it is represented that the
services shall not be performed in the Philippines based on the
Certification of the Vice President of BPI, then Softplus is deemed not
to have a permanent establishment in the Philippines to which
payment of the service fees may be attributed and is
therefore exempt from Philippine income tax. STcADa

Very truly yours,
(SGD.) KIM S.
JACINTO-HENARES
Commissioner
Footnotes

Royalties

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Royalties

Uploaded by

Copyright:

Available Formats

April 1, 2009

ITAD BIR RULING NO. 011-09

Punongbayan & Araullo

Attention: Atty. Benedicta Du-Baladad

This refers to your letter dated 24 August 2006 on behalf of

It is represented that AXA-Australia is a corporation duly

xxx xxx xxx"

With respect to the instant application for relief, the question

• in a relative sense; that is, by

Value is a relevant factor on two levels; firstly, in the

Considering therefore that the subject items being leased do

In view of all of the foregoing, the 'equipment' which consist of

e) the use of, or the right to use —

In view thereof, this Office is of the opinion and so holds that

Very truly yours,

(SGD.) SIXTO S. ESQUIVIAS IV

June 10, 2014

ITAD BIR RULING NO. 078-14

Arkray Industry, Inc.

Attention: Ms. Gemma S. Mapola

This refers to your tax treaty application ("TTRA") filed on July

"SEC. 32. Gross Income. —

— Contracts for the supply of know-how concern

— Payments for pure technical assistance;

(a) 15 per cent of the gross amount of the

The phrase 'sale or exchange of services' means the

Moreover, even though the VAT is not imposed on the

Very truly yours,

February 28, 2013

ITAD BIR RULING NO. 039-13

Articles 13 (Royalties) and

Sycip Gorres Velayo and Co.

Attention: Atty. Romulo S. Danao, Jr.

Under Revenue Memorandum Order 01-2000 of the

"SEC. 28. Rates of Income Tax on Foreign

2. However, the tax imposed by that other Contracting State

"The purpose of a most favored nation clause is to grant

In the same manner, under paragraph 1, Article 23 of

"SEC. 108. Value-added Tax on Sale of Services and

Very truly yours,

May 24, 2012

ITAD BIR RULING NO. 205-12

Article 12 (Royalties) and 24

Punongbayan and Araullo

Attention: Fulvio D. Dawilan

This refers to your Tax Treaty Relief Application ("TTRA") filed

4. LNG/LPG Cargo Handling Courses (5 days)

xxx xxx xxx

"SEC. 28. Rates of Income Tax on Foreign

"177. Copyright or Economic Rights. — Subject to the

We accordingly agree with petitioner that since the

a) The Czech Republic, when imposing taxes on

Very truly yours,

February 11, 2013

ITAD BIR RULING NO. 024-13

Romulo Mabanta Buenaventura

Attention: Priscilla B. Valer

It is represented that Avon Products is a foreign corporation

"SEC. 32. Gross Income. —

The above construction is based principally on syntax or

2. However, such royalties may also be taxed in the

a) The Czech Republic, when imposing taxes on its

Filing should always be made BEFORE the

Very truly yours,