Tax Treaty Royalties and Most-Favored-Nation Clause

Royalties from one contracting state may be taxed by both states.
U.S. tax on royalties payable to U.S. residents limited to 15% of the gross amount.
Philippine tax capped by the least of:
- 25% of gross royalties,
- 15% if paid by BOI-registered corporations in preferred activities,
- Or the lowest tax rate imposed on similar royalties paid under similar conditions to residents of a third state (MFN clause).
Defines "royalties" broadly to include payments for copyrights, patents, trademarks, designs, plans, secret formulas, processes, use of scientific equipment, or information concerning industrial, commercial, or scientific experience, including contingent gains.

Ensures the contracting state receives tax treatment no less favorable than the most favored among third states.
Requires comparing rates under other treaties to determine applicable rates for royalties paid to U.S. residents.

Royalties may be taxed in both contracting states but limited to specific rates if the recipient is the beneficial owner:
- 15% for royalties on literary, artistic, or scientific works and cinematograph films.
- 10% for royalties involving patents, trademarks, designs, secret formulas, processes, or use of industrial, commercial or scientific equipment.
The 10% rate applies only if the royalty contract is approved by Philippine authorities (technology transfer approval).
Defines royalties similarly to the RP-US treaty.

In Commissioner of Internal Revenue vs. S.C. Johnson and Son., Inc., the Court interpreted "paid under similar circumstances" as referring to tax payments, not royalties.
Lower rates from other treaties without matching credit provisions are not applicable.

RP-China tax treaty lacks a matching credit provision similar to that of the RP-Germany treaty.
RP-US and RP-China treaties both provide tax credit mechanisms for avoiding double taxation.
This makes royalties paid to U.S. and Chinese residents considered paid under similar circumstances.

RP-US treaty allows U.S. residents credit for Philippine taxes paid, subject to U.S. law limitations.
RP-China treaty allows credit against Chinese tax for Philippine taxes paid, limited to the Chinese tax on the income.
Both treaties have similar goals of avoiding double taxation for their residents.

U.S. residents can apply the 10% cap under the RP-China treaty due to the MFN clause starting January 1, 2002.
Applies to royalties on patents, trademarks, designs, secret formulas, processes, or industrial/commercial/scientific information.

There must be a valid agreement or contract specifying royalties from use or right to use patents, trademarks, designs, plans, secret formulas, processes, or related experience.
Such contract/agreement, if subject to Philippine law approval, must be duly approved by competent Philippine authorities.

Internal Revenue officers and employees are instructed to widely disseminate the Circular's provisions.
Adoption date is September 2, 2002, by the Commissioner of Internal Revenue.