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Gentlemen :
This refers to your letter dated August 10, 2006 on behalf of your client,
Canon Information Technologies Philippines, Inc. (Canon-Philippines), requesting
a ruling on the tax implication of the purchase of software by Canon-Philippines
from Gentleware AG (Gentleware-Germany) pursuant to Article 7 of the
Philippine Germany tax treaty.
That Canon-Philippines may not, nor may permit any other person or entity to use,
copy, modify, or distribute the Licensed Software (electronically or otherwise), or
any copy, adaptation, transcription, or merged portion thereof, or the
Documentation except as expressly authorized by Gentleware-Germany; that
Canon-Philippines may not modify or port the Licensed Software to operate on
platforms other than those for which it has paid the appropriate fees; that
Canon-Philippines may not, nor may permit any other person or entity to, reverse
assemble, reverse compile, or otherwise translate any binary forms of the licensed
Software, except to the extent applicable laws specifically prohibit such restriction;
that Canon-Philippines' rights may not be transferred, leased, assigned, or
sublicensed except for a transfer of the License Agreement in its entirety to (1) a
successor in interest of Canon-Philippines' entire business who assumes the
obligations of this License Agreement or (2) any other party who is reasonably
acceptable to Gentleware-Germany, enters into a substitute version of this License
Agreement, and pays an administrative fee intended to cover attendant costs; that
no service bureau work, multiple-user license, or time-sharing arrangement is
permitted, except as expressly authorized by Gentleware-Germany; that if
Canon-Philippines uses, copies, or modifies the Licensed Software or transfers
possession of any copy, adaptation, transcription, or merged portion thereof to any
other party in any way not expressly authorized by Gentleware-Germany, all
licenses under this License Agreement are automatically terminated; that
Gentleware-Germany shall have the sole and exclusive ownership of all right, title,
and interest in and to the Licensed Software and all modifications and
enhancements thereof (including ownership of all trade secrets and copyrights
pertaining thereto), subject only to the rights and privileges expressly granted to
Canon-Philippines; that this License Agreement does not provide
Canon-Philippines with title or ownership of the Licensed Software, but only a
right of limited use; that the consideration for the purchase of the software is
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$2,241.00; 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. DaHISE
On the other hand, the second Circular (RMC 44-2005 2(2)) 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:
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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;
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incorporating a software, like the license fee for the Licensed Software where the
licensee (Canon-Philippines) is merely granted access to and use of the Licensed
Software and not readily the right to market or exploit the Licensed Software.
Under the first Circular, the license fee is treated as royalties and taxable as such,
while under the second Circular, the license fee is treated as business income (or
business profits) and taxable as such, as described above.
"Article 7
BUSINESS PROFITS
"Article 5
PERMANENT ESTABLISHMENT
b) a branch;
c) an office;
d) a factory;
e) a workshop;
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Thus, for as long as Gentleware-Germany is deemed not to have a
permanent establishment in the Philippines to which its profits may be attributable,
income from its sale of software, such as that made to Canon-Philippines in the
instant case, shall be exempt from income tax and consequently withholding tax.
(BIR Ruling No. DA-ITAD 93-06 dated August 22, 2006)
With regard to the procedures for withholding and paying the VAT,
Canon-Philippines shall be responsible for the withholding of the 10 percent/(12
percent effective February 1, 2006) VAT on the license fee before making any
payment to Gentleware-Germany. In remitting to the Bureau of Internal Revenue
the VAT withheld on such fee, Canon-Philippines shall use BIR Form No. 1600
(Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a
VAT-registered taxpayer, Canon-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. If a non-VAT-registered taxpayer,
Canon-Philippines may include as part of the cost of the purchased software
provided to it by Gentleware-Germany the VAT consequently shifted or passed on
to it and may treat such VAT either as expense or asset, whichever is applicable.
In addition, Canon-Philippines is required to issue in quadruplicate the relevant
Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three
copies for Gentleware-Germany and the fourth copy for Canon-Philippines as its
file copy. [Section 4.110-3(b), Revenue Regulations (RR) No. 7-95, as amended
by RR Nos. 4-02, 8-02, and 14-02 (now Section 4, 114-2(b), RR No. 16-05);
Section 4.114(D), RR No. 2-98, as last amended by RR No. 28-03]
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By:
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Endnotes
1 (Popup - Popup)
1. Classification of Payments for Software for Income Tax Purposes.
2 (Popup - Popup)
2. Taxation of Payments for Software.
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3. Organization for Economic Cooperation and Development (OECD), 2005 edition,
paragraph 2, pages 85-91.
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