March 16, 2017

ITAD BIR RULING NO. 012-17

Article 13 (Royalties),
Philippines-United States tax treaty;
Article 12 (Royalties),
Philippines-United Arab Emirates tax
treaty

Mendoza Navarro-Mendoza and Partners Law Offices

Units 205 and 501 Amberland Plaza
Doña Julia Vargas Avenue and Jade Drive
Ortigas Center, Pasig City

Attention: AAA

Gentlemen :

This refers to your tax treaty relief application filed on July 6, 2011 requesting
confirmation that royalties paid by Magnifico Jeans, Inc. ("Magnifico") to
Wrangler Apparel Corporation ("Wrangler") 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

Wrangler is a foreign corporation resident of the United States based on its

Certificate of Incorporation and Certificate of Residence issued by the Internal
Revenue Service. It is engaged primarily in the sale of ready-to-wear apparels
("RTWs") like jeans and shirts. 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 July 22, 2011. On the other hand,
Magnifico is a domestic corporation organized and existing under Philippine laws
which is also engaged in the sale of RTWs.

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 On January 1, 2011, Magnifico and Wrangler entered into a License
Agreement ("Agreement") where Wrangler granted Magnifico a non-assignable
right and license to use the licensed trademarks in the Philippines in connection with
the manufacture, sale and distribution of jeanswear and casual wear. The licensed
trademarks pertains to the trademark 'Wrangler' and 'W' followed by the symbol ® or
TM, which are registered trademarks in the Philippines or are pending registration.
These marks are used in clothing (casual tops, casual bottoms, jackets, vests, coats,
belts for clothing, scarves, bandanas and gloves); headgear (hats, caps and earmuffs);
footwear (shoes, boots, sneakers and slippers); precious metals and their alloys and
goods in precious metals or coated therewith; backpacks; shoulder bags; handbags;
purses; wallets; coin purses; small cases. In consideration, Magnifico will pay
royalties to Wrangler amounting to 8 percent 1(1) of the net sales with minimum
royalties 2(2) for each calendar year. Magnifico desires to obtain on a continuing
basis the benefit of manufacturing techniques, know-how, and goodwill accumulated
by Wrangler and its related companies in the selling of licensed products; to receive
the aid and assistance of Wrangler and its related companies in learning methods of
operation and processes of manufacturing; and to apply such to the licensed products
made by Magnifico for sale by Magnifico and to apply such to the licensed products
under the licensed trademarks. The Agreement took effect on January 1, 2011 and
expired on December 31, 2013.

On January 1, 2014, the parties renewed the Agreement for the purpose of
extending its term until December 31, 2018, and increasing the minimum royalties
3(3) for subsequent calendar years. The renewed License Agreement complies with
the provisions of the Intellectual Property Code on voluntary licensing based on
Certificate issued by the Intellectual Property Office on March 31, 2011.

Based on the summary of payment issued by Magnifico, it paid royalties to

Wrangler every quarter from 2011 to 2014 through bank transfer.

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:

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

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 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) above: *(4) 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 income is exempt or
partially exempt to the extent required by any treaty obligation on the Philippines, to
wit:

"SEC. 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."

In this regard, paragraph 2 (b) (iii), Article 13 of the Philippines-United States

tax treaty provides relief to royalties arising in the Philippines and paid to a resident
of the United States, 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
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 both Contracting States.

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."

Under Article 13, the royalties may be taxed in the Philippines at the lowest
rate that may be imposed on royalties of the same kind and paid to a resident of a
third State under similar circumstances. This is known as the most-favored-nation
("MFN") treatment on royalties.

With respect to MFN treatment, 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 or UAE tax treaty"), effective January 1, 2009, provides a rate of 10
percent. Paragraphs 1 and 2, Article 12 thereof read:

"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 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."

With respect to the licensed trademarks subject of the amended Agreement

between Magnifico and Wrangler, including manufacturing techniques, know-how,
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 and goodwill accumulated and goodwill accumulated by Wrangler and its related
companies in the selling of licensed products, these intangible properties are
considered trademark and information concerning industrial, commercial or scientific
experience. Payments for the use of, or the right to use, such properties are considered
royalties under paragraph 3 of the Royalties article of the Philippines-United States
and the Philippines-UAE tax treaties, to wit:

"United States:

3. 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 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."

"UAE:

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." (Emphasis ours)

Accordingly, royalties paid by Magnifico to Wrangler for the use of

trademark, manufacturing techniques, know-how, and goodwill are 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-UAE tax treaty.

Finally, under Section 108 (A) of the Tax Code, said royalties for the use or
lease of properties are subject to value-added tax ("VAT"), to wit:

"SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of

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 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: Provided, that the
President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, 4(5) raise the rate of
value-added tax to twelve percent (12%). . ."

Relative thereto, Magnifico shall withhold VAT on the royalties at the rate of
12 percent before remitting them to Wrangler. Magnifico shall use BIR Form No.
1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes
Withheld). The duly filed form and accompanying proof of payment shall serve as
documentary substantiation for Magnifico's claim of input VAT on the royalties;
otherwise, if not a VAT-registered taxpayer, Magnifico may treat the VAT as a cost
or expense, whichever is applicable. VAT withheld shall be remitted within 10 days
following the end of the month the withholding was made. 5(6)

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.) CAESAR R. DULAY

Commissioner of Internal Revenue
Footnotes
1. As defined in Section 5.1 of the License Agreement.
2. As provided under Section 5.2 of the License Agreement.
3. As provided under Section 5.2 of the Renewed License Agreement.
4. 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.

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 5. 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 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:
(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."

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 Endnotes

1 (Popup - Popup)
1. As defined in Section 5.1 of the License Agreement.

2 (Popup - Popup)
2. As provided under Section 5.2 of the License Agreement.

3 (Popup - Popup)
3. As provided under Section 5.2 of the Renewed License Agreement.

4 (Popup - Popup)
* Note from the Publisher: Copied verbatim from the official copy. The phrase "and (d)
above" no longer appears in RA 9337, the law amending this provision.
5 (Popup - Popup)
4. 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.

6 (Popup - Popup)
5. 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 corporations, individuals, estates and trusts,

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 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."

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