ITAD Ruling No. 109-05, Puratos SA (2005) Whether or not the royalty payments to be made by Puratos Phils.
o be made by Puratos Phils. to Puratos S.A.
Date | Justice, J. | Specific Topic in Syllabus
SUMMARY: Puratos SA is a nonresident foreign corporation organized under
the laws of Belguim. It set up Puratos Ph to sell its products in Philippines under
the agreement that Puratos Ph will pay stipulated royalities to Puratos SA. Is the
royalties paid by Puratos Ph to Puratos SA subject to 15% preferential tax
rate? YES. This is provided for under art. 12 of the Ph-Belgium Tax Treaties.
Puratos SA is the beneficial owner of the royalities arising from sales in the
Philippines. Puratos PH is however, liable as the withholding agent (because it
has control over the payment) for the withholding VAT as said royalities is
within the definition of “sale or exhcange of services” under the tax code.
DOCTRINE: Royalty payments of Puratos PH to Puratos SA is subject to 15%
preferential tax rate as provided for in the tax treaty. Said payments are,
however, also subject to VAT.
FACTS:
1. This refers to your application for relief from double taxation dated May 13,
2005, on behalf of your client, Puratos S.A. requesting confirmation of your
opinion that the royalty payments to be made by Puratos Phils. to Puratos
S.A. pursuant to their Production Contract is entitled to the preferential tax
rate of 15% under Article V of The Protocol Amending the Philippines-
Belgium tax treaty.
2. Puratos S.A. is a nonresident foreign corporation organized and existing
under the laws of The Kingdom of Belgium with principal office at
Industrialaan 25-Zone Maalbeek B-1702, Groot-Bijgaarden, Belgium; that it
is not registered either as a corporation or partnership licensed to do
business in the Philippines per certification issued by the Securities and
Exchange Commission dated April 11, 2005; that Puratos Phils. is a
corporation duly organized and existing under the laws of the
Philippines with principal office at Mangosteen Street, corner DBP Ave.,
FTI Complex — Taguig, Metro Manila; that Puratos S.A. entered into a
Production Contract (Contract) with Puratos Phils., the effective date of
which is January 1, 2003, wherein Puratos S.A. authorized Puratos Phils.
to manufacture and sell its products as stipulated therein provided that
royalties are paid therefor, in accordance with the said Contract.
ISSUE/s:
pursuant to their Production Contract is entitled to the preferential tax rate of 15%
under Article V of The Protocol Amending the Philippines-Belgium tax treaty. YES
RATIO:
1. Article V of the Superceding Protocol on Article 12 of the Philippines-Belgium
tax treaty provides as follows:
"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.
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 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. 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 and
films and 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.
2. Since Puratos S.A. is the beneficial owner of the royalties arising in the
Philippines under the Contract, the royalty fees paid by Puratos Phils. to Puratos S.A.
are subject to Philippine income tax at the preferential rate of 15% of the gross
amount thereof, pursuant to Article V of the Superceding Protocol on Article 12 of
the Philippines-Belgium tax treaty.
3. Section 108(A)(1) of the Tax Code of 1997 states that "the lease or the use of 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" falls
within the definition of " sale or exchange of services " subject to the value-added
tax (VAT). Accordingly, the royalties paid by Puratos Phils. to Puratos S.A. shall
be subject to VAT.
4. Puratos Phils., being the resident withholding agent and payor in control of the
payment, shall be responsible for the withholding of the VAT on such royalty
payment before paying them to Puratos S.A. In remitting the VAT withheld, Puratos
Phils. shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added
Tax and Other Percentage Taxes Withheld).

5. If Puratos Phils. is a VATregistered taxpayer, the duly filed BIR Form No. 1600
and proof of payment thereof shall serve as documentary substantiation for the claim.