REPUBLIC OF THE PHILIPPINES

DEPARTMENT OF FINANCE
BUREAU OF INTERI\AL REVENUE

Articles 8(l), 5(l) and (2), and

l3(2XbXi) of the Philippines-
ljnited States of America Tax
Treaty, and Sections 28(tsXl) and
(4), 1 05 and I 08 of the Tax Code
BIR Rulins No. ITAD *d"d*.:it

BERNALDO DIRECTO & PO

LAW OFFICES
Unit 1807 Cityland Condominium 10 - Tower I
6815 Ayala Avenue cor. H.V. dela Costa St.
1200 Makati City

Gentlemen:

This refers to your tax treaty relief application tha.t was filed on December 4, 2013
requesting confirmation that the ioyalty payments made by'Diebold Philippines, Inc. (Diebold
PH) to Diebold, Incorporated (Diebold US) are subject to the preferential income tax rate of
107o pursuant to the most favored nation (MFN) clause under Article l3(2xbxiii) of the
Convention between the Govemment of the Republic of the Philippines and the Government
of the United States of America with Respect to Taxes on Income (PH-US Tax Treaty), in
relation to the Article 12(2)(a) of 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
(PH-UAE Tax Treaty).

FACTS
-Diebold US is a foreign corporation duly organized and existing under the laws of the
United States of America'(US) based on its Amended and Restated Articles of Incorporation,
and a resident thereof based on the Certificate of Residence duly issued by the Internal Revenue
Service of the US. It is engaged in the manufacture, sale, erection, disposal of and dealing in
and with all kinds of safes, locks, vaults, office equipment and systems, burglar-resisting, fire-
resisting and protective materials, equipment and devices, sffuctural materials, metal houses
and all manner of steel and other metal products, among others. It is not registered as a
corporation in the Philippines nor licensed to do business in the Philippines per the Certification
of Non-Registration of Company duly issued by the Securities and Exchange Commission.

On the other hand, Diebold PH is a domestic corporation engaged in the selling and
carrying on the business of rendering services in maintenance and repair, counselling and
giving advice on operation problems of Automatic Teller Machines (ATMs), cash deposit
machines, passbook updating machines and all kinds of financial service machines including
tools, accessories and spare parts thereof as well as related systems and computer software
programs.

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 On July 2, 2013, Diebold PH and Diebold US entered into an International Depot
Repair Agreement (the Agreement) whereby the laffer agreed to grant the former a personal,
non-exclusive right to use the licensed information and training for the sole and exclusive
purpose of operating the Depot Repair Package and to use, install and operate the firmware
only to the extent necessary to use the Depot Repair Package. The licensed information refers
to the software (including firmware) and depot repair documentation provided to Diebold PH
as well as additional repair folders associated with any module as Diebold US may allow
Diebold PH to service from time to time under the Agreement.

In addition, Diebold US shall provide Diebold PH the test equipment and tools, and a
limited license to possess and use the same solely in accordance with the terms of the
Agreement. Finally, Diebold US shall provide training for up to two (2) technicians at its
location or the location of Diebold PH within one hundred (100) working days from the latter's
acceptance of the test equipment, and an on-site support during the start-up of Diebold PH's
depot repair operation.

In tum, Diebold PH shall pay Diebold US an annual license fee of USD and
limited license fees for additional Depot Repair Packages to be determined upon
implementation of such devices in the Philippines. Service fees for on-site assistance shall be
USD per day. The said fees shall be paid within thirty (30) days from the date of invoice.

The Agreement shall be effective for a period of three (3) years and shall thereafter be
renewed annually.

RULING

In reply,please be informed that under Section 28(BXl) of the National Intemal

Revenue Code of 1997 (Tax Code), as amended, income derived by a nonresident foreign
corporation is subject to income tax at the rate of 30Vo:

SEC. 28. Rates of Income Tatc on Foreign Corporations. -

@) fox on Nonresident Foreign Corporation -

(I) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged
in trade or business in the Philippines shall pay atax 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, Thaieffective l,2009,theraIe of income tax shall be thirty percent (30%).'

However, under Section 32(BX5) of the Tax Code, such income is exempt to the extent
required by any treaty obligation binding upon the Philippine government:

I The income tax rate for nonresident foreign corporations was reduced to 25o/o under Republic Act (RA) No'
11534, otherwise known as An Act Reforming the Corporate Income Tax and Incentives System, Amending fbr
the Purpose Sections 20,22,25,27,28,29,34,40,57,109, 116,204 and290 ofthe National Internal Revenue
Code of 1997, as Amended, and Creating Therein New Title XIII, and tbr Other Purposes" a-
".,t"
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"j;F/

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 SEC. 32. Gross Income. -

(B) Exclusions from Gross Income. The following items shall not be included in gross
-
income and shall be exempt from taxation under this Title:

(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the Philippines.

Being a resident of the US, Diebold US invoked the most favored nation clause under
Article l3(2xb)(iiD of the PH-US Tax Treaty, in relation to Article l2(2) of the PH-UAE Tax
Treaty.

Royaltv Pavments for Licensed Information.

Firmware or Software

Under Article 13(2Xb) of the PH-US Tax Treaty, royalties arising in the Philippines
and paid to a US resident, except those paid by a corporation registered with the Philippine
Board of Investments and engaged in prefened areas of activities, are subject to tarat 25o/o ot
at the lowest taxrate of Philippine tax that may be imposed on royalties of the same kind paid
under similar circumstances to a resident of a third state, thus:

Article 13
ROYALTIES

l. Royalties derived by a resident of one of the Contracting States from sources within the
other Contracting State may be taxed by both Contracting States.

2. However, the tax imposed by that other Contracting State shall not exceed -
a) In the case ofthe United States, 15 percent ofthe gross amount ofthe royalties, and
b) In the case of the Philippines, the least of:

(i) 25 percent ofthe gross amount ofthe 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 circumstances to a resident of a third State.
(Emphasis supplied)

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 televisicn
broadcasting, any patent, trade mark, design or model, plan, secret formula or process' or
other like right or property, or for information conceming 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

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 The "most favored nation" clause speaks of 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, Diebold US invoked Article l2(2) of the PH-UAE Tax Treaty, which
provides that royalties arising in the Philippines and paid to a resident of the United Arab
Emirates (UAE) may be subjected to a preferential income tax rate of (l0o/o), viz:

Article 12
ROYALTIES

l. Royalties arising in a Contracting State and paid to a resident ofthe 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
ofthe other Contracting State, the tax so charged shall not exceed 10 per cent ofthe gross
amount of the royalties. xxx

a
J. The term "royalties" as used in this Article means payment of any kind received as a
consideration for the use of, or the right to use, any copyright ofliterary, 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 conceming industrial, commercial or scientifi c experience'

xxx (Emphasis suPPlied)

Therefore, the tax treatment of royalties paid to Diebold US may be taken in relation to the PH-
UAE Tax Treaty that provides a lower tax rate on the same type of income.

In Commissioner of Internal Revenue vs. S.C Johnson and Son, Inc.,2 the Supreme
Court construed the phrase "paid under similar circumstances" under the most favored nation
clause as referring to circumstances that are'iax-related. In other words, the similarity in the
circumstances of payment of taxes on the royalties derivedfrom the Philippines is a condition
for the enjoyment of the mostfavored nation treatment.
In the recent case of Cargill Philippines, Inc. vs. Commissioner of Internal Revenue,3
the Court laid down the two conditions that must be met for the most favored nation clause to
apply: (1) similarity in subject matter, i.e., rcyalties derived from the Philippines by a resident
olttre United States and of the third state must be of the same kind or class; and (2) similarity
in circumstances in the payment of tax, i.e., the tax consequences of royalty payments under
the two treaties must be under similar circumstances. This requires a showing that the method
employed for eliminating or mitigating the effects of double taxation under the trealv with the
United States and the third state are the same.

In this case, it is undisputed that the first condition was satisfied. Both Article 13(3) of
the PH-US Tax Treaty and Article 12(3) of the PH-UAE Tax Treaty cover royalties for
information concerning industrial, commercial or scientific experience and for the rrse of, or
the right to use, any copyright of literary, artistic or scientific work. The Philippines recognizes
that software is generally assimilated as a literary, artistic or scientific work protected by the
copyright laws of various countries. Thus, payments in consideration for the use of or right to
uri, u iopyright relating to software are rqgarded as royalties in the Philippines.a

2 G.R. No. 127105, June 25,1999,309 SCRA 87.

3
G.R. No. 203346, September 9, 2020.
a Section 3(b) of Revenue Memorandum Circular No. 44-2005.
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 Certainly, the royalty payments made by Diebold PH to Diebold US for the use of the
licensed information and for the use, installation and operation of the firmware or software for
the sole and exclusive purpose of operating the Depot Repair Package are within the definition
of royalties under the said treaty provisions.

The Bureau does not agree, however, that the methods employed for eliminating or
mitigating the effects of double taxation under the tax treaty with the US and UAE are the
same. The pertinent provisions of the said tax treaties are as follows:

PH-US Tax Treafy PH-UAE Tax Treaty

Article 23 Article 23
RE,LIEF FROM DOUBLE TAXATION ELIMINATION OF DOUBLE
TAXATION
Double taxation of income shall be avoided
in the following manner: XXX

l. In accordance with the provisions and 2. In the case of the ljnited Arab Emirates,
subject to the limitations of the law of double taxation shall be eliminated as
the United States (as it may be amended follows:
from time to time without changing the
general principle hereof), the United Where a resident of the l.Jnited Arab
States shall allow to a citizen or resident Emirates derives income which in
of the united States as a credit against accordance with the provisions of this
I Agreement, may be taxed in the
I the United States tax the appropriate
amount of taxes paid or accrued to the Philippines, the lJnited Arab Emirates
I shall allow as a deduction from tax on
I fhilippines and, in the case of a united
I States corporation owning at least 10 income of that Person an amount
I percent of the voting stock of a Philippine equal to the tax on income paid in the
I rorporation from which it receives Philippines. (Emphasis supplied)
I Oividends in any taxable year, shall allow
I credit for the appropriate amount of taxes
I paid or accrued to the Philippines by the
I nhilippine corporation paying such
I Oividends with respect to the profits out
I of which such dividends are paid. Such
I appropriate amount shall be based upon
I ttt. amount of tax paid or accrued to the
I philippines, but the credit shall not
| *xceed the limitations (for the purpose
I of limiting the credit to the United
I States tax on income from sources
within the Philippines or on income
I

I
I from sources outside the United States)
I provided by United States law for the
I taxable year. xxx (ErnP

It is clear from the foregoing provisions that both countries adopt the credit method for
eliminating double taxation, Le- thetaxes paid in the Philippines on royalty income are allowed
to be credited against the tax to which the nonresident taxpayer may be liable in the US or
UAE.

IPage of 9-
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 A careful reading of the treaty provisions shows, however, that the tax credit allowed
under the PH-UAE Tax Treaty is equivalent to the amount of tax paid in the Philippines on the
royalty income while the tax credit allowed under the PH-US Tax Treaty is the amount of tax
paid or accrued to the Philippines but shall not exceed the limitations provided by the US law
for the taxable year. Simply put, the tax credit allowed in the UAE for taxes paid in the
Philippines is not subject to any limitation while"that allowed in the US is subject to the
limitations provided under its internal tax law. Hence, the tax on royalties under the PH-US
Tax Treaty was not paid under circumstances dimilar to the tax on royalties under the PH-UAE
Tax Treaty.

ln view of the foregoing, thg.Bureau hereby rules that the most favored nation clause
under the PH-US Tax Treaty cannot apply. Accordingly, the royalty income derived by Diebold
US from the Philippines are subject to 25Yo pursuant to Article l3(2XbXD of the PH-I-JS Tax
Treaty.

Income Pavments for the Use of Test Equipment

Under Section 28(BX4) of the Tax Code, rentals for the use of machineries and other
equipment shall be subject to a tax of seven and one-half percent (7 ll2%) of gross rentals or
fees, to wit:

SEC. 28. Rates of Income Tax on Foreign Corporations' -

(B) Tae on Nonresident Foreign Corporation. -
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. -
ofaircraft, machineries and
Rentals, charters and other fees derived by a nonresident lessor
otherequipmentshallbesubjecttoataxof sevenandone-half percent(7 l/2%)of gross
rentals or fees.

Therefore, any income received by Diebold US from the lease of its test equipment and other
tools to Diebold PH are subject to tax at7.5Yo.

Business Profits

Article 8(1) and Article 5(l) and (2) of the PH-US Tax Treaty provide as follows:

Article 8
BUSINESS PROFITS

1. Business profits ofa resident ofone ofthe Contracting States shall be taxable only in that
State unless the resident has a permanent establishment in the other Contracting State. If
the resident has a permanent establishment in that other Contracting State, tax may be
imposed by that other Contracting State on the business profits ofthe resident but only on
so much of them as are attributable to the permanent establishment.

XXX

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 Article 5
PERMANENT ESTABLISHMENT

l. For the purposes of this Convention, the term "permanent establishment" means a fixed
place ofbusiness through which a resident ofone ofthe Contracting States engages in a
trade or business.

2. The term "fixed place of business" includes 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;

h) A mine, quarry, or other place of extraction of natural resources;

i) A building site or construction or assembly project or supervisory activities in

connection therewith, provided such site, project or activity continues for a period of
more than 183 days; and

j) The fumishing ofservices, including consultancy services, by a resident ofone ofthe

Contracting States through employees or other personnel, provided activities ofthat
nature continue (for the same or a connected project) within the other Contracting State
for a period or periods aggregating more than 1 83 days.

Pursuant to Article 8 of the PH-US Tax Treaty, the business profits of Diebold US shall
be taxable only in the US unless it has a perrnanent establishment in the Philippines. A
perrnanent establishment is defined as a fixed place through which a resident of one of the
Contracting States engages in a trade or business and includes, but is not limited to, a seat of
management, a branch, an office, a store or other sales outlet, afactory, a workshop, and a
warehouse. It also includes the fumishing 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 ag$egating more than 183 days.

Provided that it does riot establish a fixed place of business in the Philippines or does
not furnish services in the Philippines through its employees or other personnel for a period or
periods aggregating more than 183 days, the business profits derived by Diebold US from the
Philippines shall be exempt from income tax.

Value-added Tax (VAT)

Finally, the gross receipts derived by Diebold US from the sale of services to Diebold
PH are also subject to value-added tax (VAT) at the rate of l2%o undq Section 108(4), in
relation to Section 105, of the Tax Code, to wit:
%
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 SEC. 105. Persons Liable. -
Any person who, in the course oftrade or business, sells, barters,
exchanges, leases goods or propefties, 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.

The value-added tax is an indirect tax and the amount oftax may be shifted or passed on to the
buyer, transferee or lessee ofthe goods, properties or services. This rule shall likewise apply to
existing contracts ofsale or lease ofgoods, properties or services at the time ofthe 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 (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or govemment entity.

The rule ofregularity, 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 oftrade or business.

SEC. 108. Value-added Tox on Sale of Semices and Use or Lease of hoperties. -
(A) Rate and Base of Tax - There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) ofgross receipts derived from the sale or exchange ofservices,
including the use or lease ofproperties: 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 (72o/o) rxx"

xxx The phrase "sale or exchange ofservices" shall likewise include:

(l) Theleaseortheuseofortherightorprivilegetouseanycopyright,patent.design
or model plan, secret formula or process, goodwill, trademark, trade brand or other
like property or right;

(2) The lease or the use of, or the right to use of any industrial, commercial or scientific
equipment;

Lease of properties shall be subject to the tax herein imposed irrespective of the place where the
contract of lease or licensing agreement was executed if the property is leased or used in the
Philippines.

The term "gross receipts" means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be performed
for another person, excluding value-added tax.

Pursuant to Section 105 of the Tax Code, as amended, any person who, in the course of
trade or business, renders services shall be subject to the VAT imposed in Section 108 thereof.
Included in the coverage of taxable persons are iion-resident persons who perform services in
the Philippines and who are deemed to be making sales in the course of trade or business, even
if the performance of services is not regular.s Sale of services also includes the lease or the use

5
Sec. 4.105-3, Revenue Regulations (RR) No. 16-2005, otherwise known as Consolidated Value-Added Tax
Regulations of 2005. 7
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of intellectual property rights or of any industrial, commercial or scientific equipment in the
Philippines.

For the sale of services, the l2%o VAT is generally imposed on all kinds of services
performed in the Philippines6 except those falling under the zero-rated sale of servicesT or
exempt transactions.s In this case, the services rendered by Diebold US in the Philippines are
subject to lTYo VAT, while those rendered in the US, or outside the Philippines, are exempt
from VAT.

In addition, the gross receipts derived by Diebold from the lease of its test equipment
and other tools, and from the lease or use of the licensed information and copyright in the
Philippines are likewise subject to l2%o VAT.

Based on Section 4.114-2 of Revenue Regulations No. l6-2005,e Diebold PH shall,

before making payment to Diebold US, withhold the l2%oYAT,using BIR Form No. 1600
(Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld)lo
and shall remit the same within ten (10) days following the end of the month the withholding
was made.

This ruling is issued on the basis of the facts as represented. However, if it will be
disclosed upon investigation that the facts are different, then this ruling shall be without force
and effect insofar as the herein parties are concerned.

Very truly yours,

Fa^.fu
CAESAR R. I)ULAY
I7

Commissioner of Internal Revenue

04584S q"
/(

6
Sec. 108(4) of the National Intemal Revenue Code (Tax Code), as amended.
7
Sec. 108(8) ofthe Tax Code, as amended.
8
Sec. 109 ofthe Tax Code, as amended.
e Consolidated Value-Added Tax Regulations of 2005), as amended by Revenue Regulations No. 4-2007
(Amending Certain Provisions of Revenue Regulations No. l6-2005, As Amended, Otherwise Known as the
Consolidated Value-Added Tax Regulations of 2005).
roNow BIR Form No. 1600-VT (Monthly Remittance Return of Value-Added Tax Withheld).

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