April 6, 2016

ITAD BIR RULING NO. 084-16

Article 12 of the
Philippines-Germany tax treaty

Dedon Manufacturing, Inc.

Zone 7, Birds of Paradise, Riverside Canduman
Mandaue City

Attention: Ms. Grace A. Cabradilla

Finance Director

Gentlemen :

This refers to your tax treaty relief application on the royalty payments
received by Dedon GmbH ("Dedon") from Dedon Manufacturing, Inc. ("DMI") in
accordance with Article 12 of 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")

It is represented that Dedon is a foreign corporation and a resident of the

Republic of Germany based on the certification issued by the Finanzamt/Tax
Office Lüneburg on May 12, 2015; that Dedon is not registered as a corporation or
partnership in the Philippines based on the Certificate of Non-Registration of
Company issued by the Securities and Exchange Commission on April 23, 2015;
and that, on the other hand, DMI is a corporation organized an existing under the
laws of the Philippines.

It is further represented that on September 22, 2009, Dedon and DMI

entered into a Royalty Agreement ("Agreement") whereby Dedon grants DMI the
professional services of various designers of unique and classic indoor and outdoor
utility models of furniture collections, described as follows:

Designer Collection Royalty %

Harry & Camilla ZOFA 4% of FOB Cebu Price

BONNEVILLE
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 Nick Thompkins IN YANG 5% of FOB Cebu Price
PHOENIX

DAYDREAM
PANAMA
TANGO
ORBIT
Richard Frinier BARCELONA 7% of FOB Cebu Price

PLANTER ACCESSORIES
MARRAKESH
HEMISPHERE
SPA
HOLIDAY
FUTURE COLLECTION
FOR DEDON 5% of FOB Cebu
Price

EOOS STREAM
SUMMER CLOUD 4% of FOB Cebu Price

SLIM LINE
Massaud SEA SHELL 5% of FOB Cebu Price
GREEN WALL

That Dedon accredited DMI as its exclusive manufacturer of the designs and
collections of the Designers; and that DMI is allowed to sell directly the
manufactured designs and collections of the Designers to local customers wherein
a royalty is to be charged.

Royalty payments shall be made every quarter pursuant to Clause 5 of the

Agreement. 1(1)

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
Sworn Certification issued by the Finance Director of DMI on November 6, 2015.

In reply, please be informed that the Section 28 (B) (1) of the National
Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that royalties
paid to Dedon, being a foreign corporation not engaged in trade or business in the
Philippines, are subject to income tax at the rate of 30 percent, thus:

"Section 28. Rates of Income Tax on Foreign Corporations. —

xxx xxx xxx

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 (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): Provided, That effective January 1,
2009, the rate of income tax shall be thirty percent (30%).
acEHCD

xxx xxx xxx"

However, Section 32 (B) (5) of the Code, provides that such royalties may
be exempt or subject to a reduced rate to the extent required by any treaty
obligation on the Philippines, thus:

"Section 32. Gross Income. —

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

(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"

With respect to a treaty, what you invoke for this purpose is the
Philippines-Germany tax treaty. Paragraphs 1 and 2, Article 12 thereof provide:

"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.

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 2. However, such royalties may also be taxed in the Contracting
State in which they arise, and according to the law of that
State, but 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 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.

For as long as the transfer of technology, under Philippine

law, is subject to approval, the limitation of the tax rate
mentioned under (b) shall, in the case of royalties arising in
the Republic of the Philippines, only apply if the contract
giving rise to such royalties has been approved by the
Philippine competent authorities.

3. The term 'royalties' as used in this Article means payments of

any kind received as a consideration for the use of, or the
right to use, any copyright of literary, artistic or scientific
work including cinematograph 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 aforequoted provisions, 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 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.
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 Accordingly, since the royalties to be paid by DMI to Dedon under the
Agreement, being essentially royalties arising from the use of, or the right to use,
design or model, this Office is of the opinion and so holds that the royalty
payments shall be subject to 10 percent of the gross amount of the royalties
pursuant to paragraph 2 (b) of the Philippines-Germany tax treaty.

Furthermore, the royalties in question, being payments for the use or lease
of (intangible) properties in the Philippines are subject to value-added tax
("VAT"). Section 108 (A) of the Tax Code of 1997, as amended, provides:

"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.

. . . 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(2)

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 DMI shall be responsible for the withholding of the VAT on the
royalties before remitting them to Dedon. In remitting to the Bureau of Internal
Revenue the VAT withheld on the royalties, DMI shall use BIR Form No. 1600
(Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). In
addition, DMI are required to issue in quadruplicate the Certificate of Final Tax
Withheld at Source (BIR Form No. 2306), the first three copies for Dedon and the
fourth copy for DMI as their respective file copies. SDHTEC

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.

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 Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner of Internal Revenue
Footnotes
1. (ROYALTY FEE RATE OF THE DESIGNER) x (FOB Cebu Price)
Cebu Price means total Sales received by DMI from its invoice to Dedon at the
close of each month.
2. 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 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"
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.

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Copyright 2021 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2021 7
 Endnotes

1 (Popup - Popup)
1. (ROYALTY FEE RATE OF THE DESIGNER) x (FOB Cebu Price)
Cebu Price means total Sales received by DMI from its invoice to Dedon at the
close of each month.

2 (Popup - Popup)
2. 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 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"
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.

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