RMC No. 46-2002: Clarifies the implication of Article 12(2)(b) on Royalties of the RP-China Tax Treaty

Key points

1. The clause. Article 13(2)(b)(iii) of the RP-US treaty refers to “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.” It gives the other Contracting State treatment no less favorable than that granted to the “most favored” among other countries.
2. RP-China rate. Article 12 of the RP-China treaty limits the tax to ten percent (10%) of the gross royalties from the use of, or right to use, any patent, trade mark, design or model, plan, secret formula or process, or industrial, commercial or scientific equipment, or for information on industrial, commercial or scientific experience.
3. Similar circumstances. Article 23 of both treaties, though worded differently, plainly shows similar provisions on relief from double taxation for their residents. Royalty payments to residents of the US and China are therefore paid under similar circumstances.
4. Result for US residents. US residents may invoke the preferential 10% rate on royalties accruing beginning January 1, 2002, arising in the Philippines from these items, under the RP-China treaty through the clause of the RP-US treaty.
5. Conditions. There must be an agreement or contract under which the royalties paid to the US originate from the use of, or the right to use, these items or experiences. If the contract is subject to approval under Philippine law, it must be duly approved by the Philippine competent authorities.

Who is affected

• US residents receiving royalties from the Philippines
• Residents of China receiving royalties from the Philippines

Deadlines and effectivity

• Applies to royalties accruing beginning January 1, 2002