Amendments to Act No. 183

November 14, 2005 ITAD RULING NO. 131-05 Article 5 & 12, Philippines-Korea ITAD Ruling No. 75-02; ITAD No. 061-02 Sycip Gorres Velayo & Co . 6760 Ayala Avenue Makati City Attention: R.C. Vinzon Tax Services Gentlemen : This refers to your tax treaty relief application dated March 11, 2005 on behalf of your client, Samsung Electronics Philippines Manufacturing Corporation (SEPHIL), requesting confirmation of your opinion that royalty payments made by SEPHIL to Samsung Electronics Co., Ltd. (SECL) are subject to the 15% preferential tax rate as set forth under Article 12(2) of the Philippines-Korea tax treaty but exempt from the value-added tax (VAT). It is represented that SECL is a nonresident foreign corporation duly organized and existing under the laws of Korea with business address at 416 Maetan 3-dong, Paldal-ku, Suwon-City Kyungki-Do, Korea 442-742; that SECL has a representative office in the Philippines, the activities of which are limited to the conduct of market survey of electronics products, household appliances and other related products, to find out the feasibility of undertaking a joint venture agreement in the Philippines, to act as communication link between its head office and the customers in the country and to conduct such other activities which are purely coordination work; that SECL has not engaged in any business activity in the Philippines; that SEPHIL is a domestic corporation duly organized and existing under Philippine laws and is duly registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 01-11 dated July 31, 2002, with principal office address at Block 6, Calamba Premiere International Park, Batino, Calamba, Laguna; that SEPHIL is engaged in the design manufacture and sale of electronic products including, but not limited to, optical disk drive products, their components and parts; that on January 1, 2000, SEPHIL entered into an Optical Disc Drive License Agreement (Agreement) with SECL; that under the Agreement, SECL grants to SEPHIL, during the term of the Agreement, the non-exclusive rights to use the Technical Information 1 furnished by SECL to manufacture products in the Philippines and to use, sell or otherwise dispose of the products in all countries of the world; that SEPHIL shall pay SECL royalties on Licensed Products 2 which are manufactured, used, sold, leased and disposed by SEPHIL; that the royalty on technical information and knowledge shall be paid at the rate of four percent (4%) of Net Selling Price which shall be remitted to SECL within 60 days after each calendar quarter ending with the last day of March, June, September and December; and that the Agreement shall be fully effective for one (1) year from January 1, 2002, and annually prolonged with the option that SECL and SEPHIL can renew the Agreement for another year. TCacIA In reply, please be informed that Article 12 of the Philippines-Korea tax treaty states that: "Article 12 ROYALTIES "(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State if such resident is the beneficial owner of the royalties. "(2) However, such royalties may be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. "(3) Notwithstanding the provisions of paragraph 2 hereof, the amount of tax imposed by the Philippines on the royalties paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the invest incentives laws of the Philippines to a resident of Korea, who is the beneficial owner of the royalties shall not exceed 10 per cent of the gross amount of royalties. "(4) 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, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television or tapes for the use of radio broadcasting." "(5) The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7(Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. xxx xxx xxx" Based on the foregoing, a 10% preferential tax rate on royalty payments shall apply if the paying Philippine company is registered with the Philippine Board of Investments and engaged in pioneer areas of investment, and a 15% preferential tax rate, in all other cases, as long as the recipient of the royalty payments is the beneficial owner thereof and a resident of Korea. For the purpose of determining if a Korean corporation is carrying on business in the Philippines, Article 5 of the Philippines-Korea tax treaty provides: "Article 5 PERMANENT ESTABLISHMENT "(1) For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. IAEcCT "(2) The term "permanent establishment" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) premises used as a sales outlet; and h) a warehouse, in relation to a person providing storage facilities for others. xxx xxx xxx "(4) Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: xxx xxx xxx d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; and f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. "xxx xxx xxx" Considering the foregoing, and since it is represented that SECL's representative office acts exclusively for information collection and dissemination on its behalf and for other activities which are preparatory and auxiliary in character, it is clear that said representative office is not a permanent establishment of SECL in the Philippines. ( BIR Ruling No. 175-85 dated September 30, 1985 ) Accordingly, SECL is not deemed to have permanent establishment in the Philippines to which the royalty payment may be attributed to. Such being the case, the royalty fees paid by SEPHIL to SECL under the Optical Disc Drive License Agreement shall be subject to a fifteen percent (15%) preferential tax rate, based on the gross amount of royalties, pursuant to the Philippines-Korea tax treaty. ( ITAD Ruling No. 075-02 dated May 2, 2002 ). Finally, since SEPHIL is a PEZA registered enterprise and is subject to the "5% special tax regime, in lieu of all taxes", SEPHIL is exempt from VAT. ( ITAD Ruling No. 061-02 dated April 24, 2002 ) HAaDTE This ruling issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. "Technical Information" means all the technical knowledge, know-how, data and information which are available in the authorized file of Licensor and are used by Licensor for manufacturing products. (Section 1.04, Optical Disk Drive License Agreement) 2. "Licensed Product" means optical disc drive such as CD-ROM, CD-RW which shall be manufactured and sold by Licensee in accordance with Licensor's technical information and assistance. (Section 1.03, ibid )