May 28, 2002

ITAD RULING NO. 102-02

RP-US tax treaty — Art. 13

RP-Netherlands tax treaty — Art.
12
Tax Code of 1997 — Sec. 108
BIR Ruling No. ITAD-54-00

Joaquin Cunanan & Co.

29th Floor Philamlife Tower
8767 Paseo de Roxas
1226 Makati City

Attention: George J. Lavadia

Principal-Tax Services

Gentlemen :

This refers to your letter dated February 14, 2002 requesting confirmation
of your opinion that the royalty payments by your client, Energizer Philippines,
Inc. (Energizer), to Eveready Battery Company, Inc. (Eveready) are subject to the
preferential tax rate of fifteen percent (15%) pursuant to the "most favored nation"
clause of the RP-US tax treaty in relation to the RP-Netherlands tax treaty.

It is represented that Eveready is a non-resident foreign corporation duly

organized and existing under the laws of the United States of America with
principal office at Trust Center, 1209 Orange Street, City of Wilmington,
Delaware; that it is not registered either as a corporation or as a partnership
licensed to do business in the Philippines its evidenced by the Certificate of
Non-Registration issued by the Securities and Exchange Commission dated
February 20, 2002; that Energizer is a corporation duly organized and existing
under Philippine laws; that Eveready and Energizer entered into a Renewal
Agreement dated October 11, 1994 whereby Eveready granted to Energizer the
right to use its trademarks and patents, technical information, business
information, data, and know-how relating to the manufacture, use and sale of
licensed products; that the said Agreement was duly registered with the then
Technology Transfer Registry under Certificate of Registration No. 1652 dated
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 1
 January 19, 1995 and was renewed for another 10 years ending on October 15,
2009; and that in consideration of the aforementioned rights granted to Energizer,
Energizer shall pay Eveready a royalty of three percent (3%), as amended, based
on the net sales or net sale value of all the licensed products manufactured, used,
sold or assigned by Energizer during the term of the Agreement.

In reply, please be informed that Article 13 of the RP-US tax treaty reads as
follows:

"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 both
Contracting States.

"(2) However, the tax imposed by that other Contracting State shall
not exceed —

(a) ...

(b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of the 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 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.

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 2
 "xxx xxx xxx"

On the other hand, Article 12 of the RP-Netherlands tax treaty provides:

"Article 12

ROYALTIES

"1. Royalties arising in one of the States and paid to a resident of

the other State may be taxed in that other State.

"2. However, such royalties may also be taxed in the 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.

(a) 10 per cent of the gross amount of the royalties

where the royalties are paid by an enterprise registered, and
engaged in preferred areas of activities in that State; and

(b) 15 per cent of the gross amount of the royalties

in all other cases.

"xxx xxx xxx"

Based on the foregoing, the tax imposed on royalties derived by a resident

of the United States from sources within the Philippines shall be the lowest rate of
Philippine tax that may be imposed an royalties of the same kind paid under
similar circumstances to a resident of a third State. This is the "most-favored
nation"` clause found in Article 13(2)(b)(iii) of the RP-US tax treaty. In this
connection, it must be noted that the royalties arising from the Philippines and paid
to a resident of the Netherlands may also be taxed in the Philippines but the tax so
charged shall not exceed 15 per cent of the gross amount of royalties in cases other
than royalties paid by in enterprise registered in preferred areas of activities in the
Philippines. The term "royalties" as used in this Article means any payment of any
kind received as a consideration for the use of, or right to use, any patent,
trademark, design or model, secret formula or process, or for the use of, or the
right to use of, industrial, commercial or scientific equipment, or for information
concerning industrial, commercial or scientific experience.

In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son,
Inc., and Court of Appeals, G.R. No. 127105 promulgated on June 25, 1999, the
Supreme Court interpreted the "most-favored-nation" clause, particularly the
phrase "paid under similar circumstances," as referring to the manner of payment
or taxes and not to the subject matter of the tax which is royalties. Hence, the
"most-favored-nation" clause of the RP-US tax treaty must be interpreted not only
Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 3
 in relation to Article 12 of the RP-Netherlands tax treaty but also in connection
with the provisions on the elimination of double taxation of both.

A perusal of the RP-US and the RP-Netherlands tax treaties, particularly

their provisions on the avoidance of double taxation, shows a similarity on the
manner of payment of taxes, that is, the allowable foreign tax credit on both
treaties is the amount actually paid in the Philippines.

Such being the case, and since Energizer is not registered and engaged in
preferred areas of activities in the Philippines, this Office is of the opinion and so
holds that the royalty payments by Energizer to Eveready are subject to the
preferential tax rate of 15% of the gross amount of royalties pursuant to the
"most-favored-nation" provision of the RP-US tax treaty in relation to the
RP-Netherlands tax treaty. (BIR Ruling No. ITAD-54-00 dated March 7, 2000)

Moreover, the above royalty payments by Energizer shall be subject to the

10% value-added tax (VAT) under Section 108(A)(1) and (3) of the Tax Code of
1997. Section 4.102-1(b) of the implementing Revenue Regulation No. 7-95
provides that:

"The VAT on rental and/or royalties payable to non-resident foreign

corporations or owners for the sale of services and use or lease of properties
in the Philippines shall be based on the contract price agreed upon by the
licensor and the license. The license shall be responsible for the payment of
VAT on such rentals and/or royalties in behalf of the non-resident foreign
corporation or owner by filing a separate VAT declaration/return (BIR Form
No. 1600 – Monthly Remittance Return of Value-Added Tax and Other
Percentage Taxes Withheld) for this purpose. The duly validated VAT
declaration/return is sufficient evidence in claiming input tax credit by the
licensee."

Accordingly, Energizer shall be responsible for the withholding of income

tax at the rate of 15% of the gross amount of royalties. Moreover, Energizer shall
also be responsible for the withholding of the value-added tax (VAT) at the rate of
10% of the contract amount by filing a separate return using BIR Form No. 1600,
which, if duly validated, shall be sufficient evidence in claiming input tax credit.

This ruling is issued on the basis of the foregoing facts as represented.

However, if upon investigation it shall be disclosed that the facts are different,
then this ruling shall be considered null and void.

Very truly yours,

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 4
 Commissioner of Internal Revenue

By:

(SGD.) MILAGROS V. REGALADO

Assistant Commissioner
Legal Service

Copyright 2014 CD Technologies Asia, Inc. and Accesslaw, Inc. Philippine Taxation Encyclopedia First Release 2014 5