CTA Case No. 5135

REPUBLIC OF THE PHIL IPRINER

COURT OF TAX APPEALS

CLR ZON CITY

' SASF COATINGS ANT INKS PHILIPRPINER, INC.

Petitianger, ~ OE BAR CTA CABE NO. S135 COMATES TONER OF INTERNAL. Promalgatedcdts Reapondant.

DEC TR TOM

This case invelver a ctatea for refund in the sum of Pty, G18, 6% ae avewpadd withholding tan an reyalty paywentas ta BASF Carperation, PDeolarare, U.9. A. (ADORE ~ 1S. far brevity) corre gpending ta the period from Tully 1, $998 to Haveh 31, £95.

Petitdener, BREF LCeabings ant Inhe Phikes., Tne. (BOT fer shart) is a domeshie pregiaberacd cacperat ian engaged in the manufachure of peinting tohx ane aumtidarios for the graphica and packaging industries, with business addrywee af 20% Marces Alvaree Avenue, Aa. Talon, Las Pinas, Metra Mani tea.

tte predeceasav, Pulk oand Wiberg, Phil. Branch, entered into a Rraphics License Ggreement (Fah. "0", Pet. g op. Fe OE, OTA vec.) with BAS - U.S.A... on Aeboher 1086 C17. A. CASE HO. Si as ne PG, (UAE whereby the lather granted te the former the right to use the knew-hew far the sanufacture of printing inks and auniliartes for the graphice and packaging industry tai. In return, Ault and Wiberg agreed to pay BASF - ILS. ff. a two-percent (2%) royalty based an the net antes of the praducts Lf manufactured and aoled ar une, The Oraphics License Agreement hetueen Ault and Wiborg and BASF ~ § 6.7. ewan vegtsteared with the Technology Tranefar Board of the Bureau of Patents, Trademart:s and Fechos laggy Transfer aa evidenced by Certificate of Reytateation Ma, GS dated Aaguat $, 10a (Rabe. "DO", Pret. a te Fe, CTA ree. db.

(Yn August ty oo), upon appltcatian eith the Securities and Exchange Cometention, fielt and UWibarg’ « license te engage iin fusineds in the Philippines was rancebled ish. "HA", Beh. pm. 7, CFF wee. be ws even Amate, the name fe off ioe appr oe) thoes registration of the firttieles of Incerporatian af BCP (Feb. "BY, Pek. g pe Thy CTO pened.

Cin Hoyvmebher 1.2, {990, the Technology Transfer Poglatiny of the Burceau af Patents, Tradeaarks ane, Teehmolegy Transfer fiseued Certificate of Regiatrat tian He, O88 TExh, NEM, Pet. g op. 33, CTA ree.) to reflect the due wentetratian of the Graphics License fgreesent between BSF ~ 1.8.6. and petitioner BOF, 1089

DEE ES TOBE

m.7. 8. CAGE RO, SES For the period from July f, 1998 te March 31, 1993, petitioner paid te BREF —~ (..8,8,. royalkios in the tetal ameint of OF, F19, 497.45 and remitted ta the f. 0. ft. P74, G64. 59 22 ON withholding tax thereon, me, Relieving that under the aont faverdd nation claiiee af the ff - UG Taw Treaty, the tax isposablhe on rayalt ten thould he only fot, petitioner alleged that tte tax remtttance te the BIR was in excess by PIGT, 418, 65. Hence, 1m Aagesh 27, 2594, it filed with the Oppetlote OHivisiton af respondent ai claie for refund or Baw cooaehit in the aeount of PLAT, 915. 65.

fe the tea-year prescriptive periad for the filtag ef a refend claim i abawt to expire, and respondent has nob ached on the claim of pebitianer, the latter filed the inetant petition on August @, £9o4, fn Gepbesber @, 1994, respondent filed her Anenwer alleging the fellowing an special amd affireative defensea, to wdte "hh. The herein withholding tax on royalties is preaueed ta have been paid and callerbed in ares apa nce wh tits law mre eriet tag WLR Regulations on the satter, Fe Reticle @4 (b>, (dd) and tedfce) of the RP Het Bermany Taw Treaty allows a eatching tar eredit oof 2O% te Bergang receiving royalties arising in the Philipines, whereas, GHrbicle $A, @lhi fits) of the AP ~ US Tax Treaty does oot so peeavide. Hence, -® resident of the United States is not entitled ta the “wart favorad nation” tax rate of 10% on rayalty ~ 1090

DEC Te Tee

OC. 7. CRF HO SE 4 incase derived from the FPhilbltpopines for the stieple reason that the payment of such tay is net under similar civenumetances as the matching ervedit oof 2O% for royalties being granted under

the FP ~ Hest Germany Tay Treatys

A Rulings peeviausly issued by the respondent allowing the avatiment af the tenefite of the "moet favored nation” clause on paywentsa of royalties to recipionterrenidant of the United At at oe have already been revoked ef fertive January 21, 1992 pursuant ta Revenue Mesorandums Circular Ma, 3-Bir,

9. The petition ataten moe cause of action, there being na allegation as tei the various dates the alleged wilthhealding tax paysente an raymleie vere mate and/or effected by the petitioners

10. The aslleged withholding tax payments on reyeltioa eovertny the period Tuly &, tn to Auguet ot, 199e are no longer refundable, the saae being already barwed hy Latches, Va. Claies for tax refund/seredit being in the nature of eveeption from are canstrued strictly By iiaet the elaimant fpetittoners: CTrewl wr Luaber no, ve. Court af Yas Opneals, eb al.,

Poy BCR FP Manila Blectrde Cre Vita

Commissioner of Internal Revinue, Octeber BF, ta7s, G? BOM Sr, The tem feeuer te be addudicated in this case ares

4. Hhether or neat petitioner ia enhit Led te the Dower tae rate of 16% under the Pmant favared nation” ctlawne of the PE - UB. Tas

Treaty: and

eB, Hhether or net the withhealding tar peywents covering the periad fram July 2, Pet toe fugust £, DR have aleredy pre dori hed, ' 10914

DECERSTO

wi Ament the firat isaue, this Ceurt ance again ruled in faver of pebit toner. the legal arguments readiaed by reasponmient in her gpecial ant affirmative defenses tact aiveady heen settled by thie Court in the case of "RM Mttippines, Ine. va. Comntastoner of Internal Revenue, * CYA Case Mo. 4308, derided on Maret 34, 1993, ohare t& trae riled thats "ts the eecant ieasue, whether oar nok petitiansr sheuld be btavwed at the reduced rahe of Lom% owithhabding tam oan roypaLt ter in aveovdance wlth feebicle 12 (23 (bh) of the A.B, Yeak Germany fav Traaky and nok Se withhelding tax an reayaltden under Article 3% (> (hh) ©4947 of thea PP. - LG. Taw Treaby.

This Reurt tea af the persauaaton that petitioner’ « stand ig carrect and cancura with the apintan rendered by then Coawisatoner nf Internal Revenue, Bienvenido Tan, (BIA Ruling He. ATE -88, onpra., that under the aoet fayvorerdt nation peovision of the RP. - U.S. Tax Treaty (rtiole i323 parvsgraph @ (i) 44447, the tax isposable on royalties: derived by @ resident of the United Gtates fraw saurcer wlthin the Pri lipopines ahall he the Lowergt vate of Philippine tay that aay be iaposen an royalties ot the TAME inet paid vocder similar eirevestances boa a yesident of «a third atate. Artiole 18, paragraph & (bs of the PLP. - Bast Geraany Tas Treaty, provides that royalties aritadng in the Philippines and paid teaioa resident of West Germany may aleo be tanec in the Philtopines, Bub the tay ae charged shadl reat exmend tere of the gress armaunt of reyaltbies. Said treaty also prevides that far ar ieng as the tranefer of technelagy under Philippine law, ia eubject toe appraval, the limitation of the tan rate in ease of royaltien ariotny in the Philippines, apply «fF the fenteact giving riae to such royalbbies hag heen appraved by Philippine competent authorities.

Mo A. ASE ME, MES Thes, inasmuch as the Agreement hetween Morde Trade and EDM Phile. ag well as the Agreesent between TBM aod TBM Phfle. hac been appr y aes hy the Central Bank of the Philippines, royalties arising in eben Philippines: aod peayatie ta Hertd Teade aa wall ae te TAM by TAM Phila, shautd be taxed at the rate of 16% becavee said rate i« indicated in the fF. - Hest GQerwany Vex Treaty and pur asuant te Articole 14, paragraph B tb) (414), of the PoP. - HG Tan Treaty, Reapondant' s allegatian that the previsiorn of retehing credit under ticle 24 of the RE ~ West Geraany Yay Freaty negates the anplicatian af the "aert favored pation’ claude of the FeO - Le Tax Treaty, berause the payment of fax an royalties ts net “Mundor stallar cieceoungbances, * had likewise been exaolved ty thie Ciaek ino Peselution, dabed July @1, k99a and promulgated vader the aforementioned OTA Case Mo. 4308, In paid Resolubion, this Court resealved thats:

tt ja wlaimed hy Ehe respondent that this Carat arred oin granting the refund since pebitianer de not entitled ta the ‘wax favored fawn rate oon royaltiea. * (Motion, €. 7.8.

Remsrads, poo Sanh) The applicable proevisien af the FL. W.5. Tax Treaty provideds "Ark. V3 €B) bly) Cad. yan CTOhe tay imposed by that other Canteactinag State shall not ewoeed the lLowant rete oof Philingpine bay that way he ieposed oan rayalbier of the «ame hind paige under sigtlar cireusgkences toa a , resident aft & hydra atate.”

ilinderseor ing suppl deed) Feaspondent advanced Nis argument an the premigce that the FAP. © Germany Tau Traaty, - 1095

DEL PE TEI

rT. MASE HO, 41 as yy whieh pratides For a if tax on royaltios, dogs nek apply tn the aoese under contideration, He argued thats ‘Under the wax previeions of the Herman Tan Treaty, there ie * “watehing ecredit* in Gereaany of 15% ang Birt, GQ Tavation ef Aebinig fF

(Retief Free Geuble Taxation of the

RP. = ING. Tan Treaty), there ds no

TAA CORPORATION FD TNTERMAT TOMA

ALIS TINE MACHINES CORPORATION are nat entitled to the ‘eoet favored nation’ tan vate an roypalkios (1099) bhegause theis payaent of the ter ie nat under tieilar circumstances f.e., there is ‘matehing cradit’ in Bermany (20rk for royalbies!, while there jis no such eredit ino the 11.8, Hn. iMot lon, 0.7.0. Reoareds, po. 340) Qaated belar ia the pearkinant provigtoans af the FP. - flermany Vasu Treaty which rede s et icde 24 Relief? feos Double Taxatian

1. Taw hall be deteratined tn the case of 9 roegidenk of the Federal flepubliec of Germany as follows:

we MAH eB bb fubject to the provinions of Gergan tax law regarding credit far foreign tax, there shall te ab lod ae im credit ageing: Gereaany tocame and corporat Lian % en payable in yreapeek oof the following {teas of inmrome arising itn the Republic of the Philippines, the tax peid under the l mers of the PHilippines and in aecardance with thie Sgreement ons 36 50H vO HUM MP... ESE OBO PRP Oees ae) vreyalties, an def dread in paragrath 3 Article 2, Hf HE A Hf i at For the purpase oaf gredit referred to in subparagragt fb}, the Pritionine tay shath be deamed to ta

DE Miuw OT

ened in the ease of reyalties for which the tax ina reduced to 19 ar 1S perement aceernding to paragreapt 2 of frtiele GR, @0 percank af the gross amount af such royaltiedg. % Te sebtle ance and far all the legal faaas involved din thie case, Ethie Court deems 1¢ wise te decide en the prapner tobterpretation of the pire a ger ‘pain under sisiler circusatanced. @ Does the pheage refer te tay paid ae clatmad by respondent or dees it refer to reyaltien pate as advanced by pebkit loner?

A cupgery porugak ef the provision makes thie Cert te agree with the petitioner’ a interpret at fon. The phrace “pate uniter atailar circumstances” ia followed by the phrage "ta a tetident of a thtrd atate,* Tt fn clear thot whah ts poid ta a resident of a third atate is royalty aud nok tac, Petitianer ener dreh by peak in Ab “Oppoe it dan te Mebtion for Reconsideration" thats *He spond st ae in ef fort amending the previnion of tive R, FY.

L. &. tar Ayr ea fel Y Aet tole SCE) (hd add) speeks of “Cravaltios of the same kind peatd under etmilar circumstances te «a resident of third gtebet , Bhaynahe ay ot doee AR apesk, whether enpresa ar dimepided, af Fax paie under etat baa edie emt ances. Respondent ie reading tote the FP. 4.8. jl#aw treaty eawetining hat fa clearty nok there.

1095

l. 7. 8. COVED RO. TRE RSS The requ hr emt oF ‘simi Ler eleeumsbtances? i¢ tn relation to the paymonk af royalty, neh payaant af the tan. Thus, for instunce, the royalty odin question aeid te ai tt. a. ree tient by petit dane fwbich te neither BOl-regiatered enterprise nar engegod in a preeferped-pi onear aohiviby> ode net paid under similar circustbances as a rayslty paid te a ron dd ak of Denwaerk or Bmeden tn reepech oF wokionw pichure files and tapes is not paid oouncer siatlar cirocvestances an the rayalty herein pated by pebitioner te fhe i, &., Liseneurs. Clearly, thea phirece ‘similar circumatances? ia used in re Feyenee te the payeaent oof the roevalty, and woh reference te the payesnkh of tau." (OppestO ion, €. 7. Records, pp. FA5- R64).

In & @oat recent cade decided by thie Court on April es, 13996, {$k was eaptaaiced that there are teo iaportantk raquirements that should he presenter cempliedt etth before the fe rate of withholding tax on royalthes remitted ta @# U9. resident sayhe availed of. These areas

t. tt 8 necessary that there be an ayrtemeGk oof a contract awherety the royalt den paid toa the 0.6. originate froma the use of, or the vrighh tu wee any patent, tradamarh, dastan ovr wodel, plan, ageretf foreula 7 pracens, ar from the use, ar the right te use, industrial, commerectiol ap acienebific exporianee, ane, te the contract or agreement must be daly approved hy Philtppine cempetent suebhortt led. taee ny 13, Deeieton in CTA Cage Ho. Shai, “Jardine PBavies, Inc. and Macehyte Conapany, #8 Giviston of fiegt eet luduetyies, Tae. Ye. Coasicatiener af Internal Revenue,” promalgatect om Aged, 23, 1996, ) ~ 1096 CULT... EASE MU SE CeS Petitioner has coanplied with the above-ment danec requirement 6. jt afferad in evidence the Geaphic License Agreement anenuted by and hetegen Ault and Miborg, petitionerts pemfecassar, and BASF ~ LAA (uh, UE) ae weil oas the Certificate of Registration of such agreement (Beha. "DY ane TRF duly isaunad by the Taechnelogy Transfer Regteatry of the Bureau of Patents, Trademarks and Tochnology Trang fer.

The ortual remithence ta the BIR of the asount being chained an vrefundabie/tayn creditable wan alee praven ty pebibioner when ib presented the Manthly Pesttteance Retearns of Inoowe Taxes Withheld GIh Fore 1765 4) far the subject perdod. They were marked and of fered an Evxhibite 8Fh, bet"y SI" bo "OR", aneluatve, feud oon pages GF te 106 ef the CTH rereoreds, Payrents made through the bank ary clearly reflerted by the michine vVelidations appearing at the bettes pertions ef raid retarna ar enleb bits.

As ubeted under paragraph 12 of reepandent® a Anger fm. 40, O78 reed and lihewiee under second fesue of ber Hesarancdue (fg. ISR, OT wer. dy the withholding tar payments on rayalties covering the period Tuly 1, U9O8 ta Augeab o4, ae are one lenger refuncable. They are already bayred byt leeches, <inasesuch as the tostant 109%

PEC PETC

MF. CoE OME, Sans 4 petition wae filed nanly an Auguet 2, (994, or a day heyend the tuo-vear pertiad previdiad for by Lav.

The Court begs te disagree, Payaente of withhalding taxee on royelbtes for the pertod July t, 1992 fa August ', 1990 did nob preserife, fespondant arruneots by rectomned the tive-yaar preogeripbive poriod fran the dates ot payment of the povealtios. Gectien #40 of the Taw Code clearky pravides thet the teua-yeer period showld ter counted from the date of payment of the tan, oot from the payment of royelttes, Conaidercing therefore, that the withholding tax on royalties fer the month af July, oe on paid ore Genes 10— LOR and Septesber 20, 1908 lame waekhinge valiqetions of bank, bottom parks of Eubos. “EY and "Pt" of pettitionery pe. FF aad FH, ETA rec. by aret the withhetnting tax ean rayalbias far fupgeat, t98R pae paid oon Geotember , 1998 (see alan machine validations of bant, babies parte of Exh. "9", Pek. pg ote 8, OTA ree, d, the filing of tnetant petition an Auguat @, Pay wee welt within the bua-yvear period preacribed By Sect ion @30 ef the Tax Eorte, the prasentakian af the aferamentioned eshibits together with the Statements of Royalties Payable to RAS Corporation ¢Evba. HAP ba 81", dnmelusive of aub-sarhings) peaperdy identified by Ma, losefa Esxtepa, petitioner? « Mp t ned a, strengthened = all the more pebittaner’s 1096

OPO TE PR ~

1 entitlement to the refund/tar aredit being glatmed.

Reapondewk: did at eoniy fatlh te camment on petitioners offer af evidenme, tut she Likewiag failed te priesent any evidence toa contravert petitioner’ « claia.

HHEREFORME, finding inatant petition serdtorioung the Court GRANTS the saee, and hereby ORDERS respondent ta REFUND / TBC fe TM CREDIT CRATIFICATE in favor af pebtitdener in the saaunt of One Hundeed Gittty Geen Thermus are Hine Hundred Etghteen Pesos and Ginxty-Five Centaven t(PtGy, 916.68) as oaverpaid withhulding bax an rayaity payments for the period free July 1, 192 fo - ‘ mae RAMON ©. DE

Axsoctate Judy

March Fi, VIoa.

80 OMADERED.

1 COMDLATs

aaAK Q« 3 ERVES TO D. PEKATA Mregiddivg Tuc ae CERT Er Bee’ beyne {} thereby cerhify that this decielen was reached after dus cansultation with the soemhera wif the Couck of 1099

BEE PECL

C.7. 0, O86 Ho, 4 3 Tax Appeahs in accordance with Sertion 13, Aeticlke VITT of the Cont ftut ton.

Preaiting Tuchye

Couet of Pav Appeals

1100