Question & AnswerQ&A (DOLE DEPARTMENT ORDER NO. 13)
The tax charged shall not exceed 10% of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience.
The purpose of the "most-favored-nation" clause is to grant to the other Contracting State a tax treatment that is no less favorable than that which is granted to the "most favored" among other countries.
The tax imposed by the Contracting State shall not exceed 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.
Royalties include payments for the use of or the right to use any copyright, patent, trademark, design, model, plan, secret formula, process, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience, including gains from the sale, exchange or other disposition contingent on productivity, use, or disposition.
Yes, royalties derived by a resident of one Contracting State from sources within the other Contracting State may be taxed by both Contracting States.
For royalties subject to transfer of technology approval under Philippine law, the limitation of the tax rate to 10% under the RP-China tax treaty applies only if the contract giving rise to such royalties has been approved by the Philippine competent authorities.
1) There must be an agreement or contract specifying the royalties as arising from the use of intellectual property or scientific experience, and 2) if the contract is subject to approval under Philippine law, it must be approved by the Philippine competent authorities.
The Supreme Court interpreted it as referring to the payment of taxes and not the royalties themselves, meaning that the tax circumstances must be similar for the clause to apply.
Both articles provide for relief from double taxation by allowing the resident of one Contracting State to credit the tax paid or accrued to the other Contracting State against the tax payable in their home country, subject to the limitations and provisions of their respective laws.
Because the tax on royalty payments to residents of US and China are considered paid under similar circumstances, US residents can invoke the preferential 10% tax rate under the RP-China tax treaty by virtue of the most-favored-nation clause in the RP-US tax treaty.