May 27, 2003

ITAD RULING NO. 073-03

Art. 12, RP-Switzerland tax treaty

BIR Ruling No. ITAD 45-99

Paras and Manlapaz

1402 Equitable Bank Tower
8751 Paseo de Roxas
Makati City

Attention: Mr. Agenico T. Paras

Ms. Siddharta JP III S. Pearedondo

Gentlemen :

This refers to your application for relief from double taxation dated October
21, 2002, requesting for 15% preferential tax rate on the royalty payments of VSL
Philippines Inc. (VSL-Philippines) to VSL International Ltd. (VSL-Switzerland)
pursuant to the RP-Switzerland tax treaty.

It is represented that VSL-Switzerland is a non-resident foreign corporation

organized and existing under the laws of Switzerland with principal address at
Scheibenstrasse, 70-CH, Bern, Switzerland; that it is not registered either as a
corporation or as a partnership and has not been licensed to do business in the
Philippines per certification issued by the Securities and Exchange Commission
dated August 29, 2002; that VSL-Philippines is a corporation duly organized and
existing under the laws of the Philippines with principal address at 4/F RFM
Corporate Center Building, Pioneer cor. Sheridan Sts., Mandaluyong City; that the
nature of VSL-Philippines' business involves the application and sale of
engineering services using the technology and designs of VSL-Switzerland; that
VSL-Switzerland and VSL-Philippines entered into a License Agreement dated
January 1, 2002 whereby the former, being the inventor of the VSL System, grants
the latter an exclusive license under the Patent Rights, Know-how and Trademarks
to: (1) promote, market, use, apply and exploit the VSL Systems in the Territory;
(2) manufacture certain components of the VSL Systems pursuant to the provisions
in subsection 10.2 of the agreement; and (3) sell and distribute the components to
third parties in the Territory; that in consideration for the rights granted under the

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 agreement, VSL-Philippines shall pay VSL-Switzerland the following license fees:
(1) 3% of VSL-Philippines annual audited turn over, excluding VAT; and (2)
irrespective of the turn over actually achieved by VSL-Philippines, the license fees
payable to VSL-Switzerland shall not be less than Ten Thousand Swiss Francs
(10,000-CHF) each year; that any and all license fees shall be paid in annual
installments calculated from January 1st to December 31st of each year, free of
any taxes, levies, dues, transfer charges, and other deductions.

In reply, please be informed that Article 12 of the RP-Switzerland tax treaty

provides:

"Article 12"
"Royalty"

"1. Royalties arising in a Contracting State and paid to a resident of the

other Contracting State may be taxed in that other State. aHSAIT

"2. However, the royalties may also be taxed in the Contracting State in
which they arise and according to the laws of the State, but 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 information concerning industrial,
commercial or scientific experience.

"xxx xxx xxx"

Based on the aforequoted provisions the tax imposed on royalties derived

by a resident of Switzerland from sources within the Philippines may be taxed in
the Philippines at a rate not exceeding 15% percent of the gross amount of the
royalties.

In view thereof, your application for tax treaty relief is hereby granted at a
final withholding tax rate of 15 per cent of the gross amount of the royalties (BIR
Ruling No. ITAD 45-99 dated December 2, 1999). However, since
VSL-Philippines shoulders the tax imposed on this income, the withholding tax
rate of 15% shall be computed on the grossed-up monetary value of the royalty
payments. The correct tax base is arrived at by dividing the monetary value of the
royalty payments by eighty-five per cent (85%).

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 Moreover, the royalty payments by VSL-Philippines for the exclusive
license provided by VSL-Switzerland in the Philippines are subject to the 10%
value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly,
VSL-Philippines, being the resident withholding agent and payor in control of the
payment, shall be responsible for the withholding of the 10% final VAT before
making any payment to VSL-Switzerland. In remitting the VAT withheld,
VSL-Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of
Value-Added tax and Other Percentage Taxes Withheld). The duly filed BIR Form
1600 and proof of payment thereof shall serve as documentary substantiation for
the claim of input tax by VSL-Philippines upon filing its own VAT, if it is a
VAT-registered taxpayer. In case VSL-Philippines is a non-VAT registered
taxpayer, the passed on VAT withheld shall form part of the cost of the service
purchased which may be treated as "expense" or "asset" whichever is applicable.
In addition, VSL-Philippines is required to issue the Certificate of Final Tax
Withheld at Source (BIR Form 2306) in quadruplicate upon request of
VSL-Switzerland, the first three copies thereof to be given to VSL-Switzerland and
the fourth copy to be retained by VSL-Philippines as its file copy. [Section 4 & 6,
Revenue Regulation (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR
14-2002]

This ruling is issued based on the facts as represented. However, if upon

investigation, it shall be disclosed that the said facts are different, then this ruling
shall be without force and effect insofar as the herein parties are concerned. cADEHI

Very truly yours,

Commissioner of Internal Revenue

By:

(SGD.) MILAGROS V. REGALADO

Assistant Commissioner
Legal Service

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