Smart Communication (Smart for brevity), is a domestic corporation and duly registered with the Board of Investment.
Respondent Smart entered into three agreements for Programming and Consultancy Services with PRISM Transactive, a non-resident corporation duly organized and existing under the law of Malaysia. Under the agreement, PRISM was to provide programming and consultancy service for the installation of SDM and CM, for the implementation of SIM.
PRISM billed respondent of US$547822.45 and respondent withheld the 25% royalty tax of US$136,955.61.
Respondent filed a claim of refund with the BIR of the amount PhP7,008,840. Respondent claim that it is entitled to a refund because the payment made to PRISM are not royalties but business profits pursuant to the definition of royalties under the RP-Malaysia Tax Treaty.
ISSUE: WON the payment made to PRISM constitite "business profits" or royalties?
HELD:
SDM Agreement read, "The SDM shall be installed by PRISM, inlcuding the SDM libraries, the Intellectual Property Right (IPR) of which shall be retained by PRISM.
SIM agreement provides, " The client shall own the IPR for the specification and the source code for the SIM application.
PRISM has intellectual property right over the SDMprogram, but not over the CM and SIM application programs as the proprietary rights of these programs belong to respondent. In other words, out of the payments made to PRISM, only the payment for the SDM program is a royalty subject to a 25% withholding tax.
A refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM application agreement is therefore in order.
Respondent Smart entered into three agreements for Programming and Consultancy Services with PRISM Transactive, a non-resident corporation duly organized and existing under the law of Malaysia. Under the agreement, PRISM was to provide programming and consultancy service for the installation of SDM and CM, for the implementation of SIM.
PRISM billed respondent of US$547822.45 and respondent withheld the 25% royalty tax of US$136,955.61.
Respondent filed a claim of refund with the BIR of the amount PhP7,008,840. Respondent claim that it is entitled to a refund because the payment made to PRISM are not royalties but business profits pursuant to the definition of royalties under the RP-Malaysia Tax Treaty.
ISSUE: WON the payment made to PRISM constitite "business profits" or royalties?
HELD:
SDM Agreement read, "The SDM shall be installed by PRISM, inlcuding the SDM libraries, the Intellectual Property Right (IPR) of which shall be retained by PRISM.
SIM agreement provides, " The client shall own the IPR for the specification and the source code for the SIM application.
PRISM has intellectual property right over the SDMprogram, but not over the CM and SIM application programs as the proprietary rights of these programs belong to respondent. In other words, out of the payments made to PRISM, only the payment for the SDM program is a royalty subject to a 25% withholding tax.
A refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM application agreement is therefore in order.
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