BIR Ruling [DA-009-97]

January 9, 1997 BIR RULING [DA-009-97] Clarion Mitsuwa Philippines, Inc. 3/F Cacho Gonzales Bldg. 101 Aguirre St., Legaspi Village 1200 Makati City Attention: Ms . Luz C . Cuyco Finance/Administration Manager Gentlemen : This refers to your letter dated June 25, 1996 requesting for a ruling that your remittance of royalty payments in favor of Mitsuwa Chemical Company, Ltd., of Japan is subject only to the preferential rate of 25% Philippine income/withholding tax pursuant to Article 12 of the RP-Japan Tax Treaty. It is represented that Clarion Mitsuwa Philippines, Inc. (Clarion Mitsuwa) is a domestic corporation organized and existing under the laws of the Philippines duly registered as a Zone Export Enterprise at the Cavite Export Processing Zone, under Certificate of Registration No. 92-040 and principally engaged in the manufacture and assembly of plastic products specifically on car audio equipment and accessories; that Mitsuwa Chemical Co., Ltd. (Mitsuwa Chemical) is a corporation organized and existing under the laws of Japan not registered to engage in business in the Philippines; that on June 24, 1996, a Technological Transfer and Assistance Agreement was executed by and between Clarion Mitsuwa and Mitsuwa Chemical whereby the latter as licensor, grants the former among others, the right to use technology and technical information for the manufacture and assembly of plastic parts for "Licensed Clarion Products" as well as technical support under Article 3 of the said Technological Transfer and Assistance Agreement; and that in consideration thereof, Clarion Mitsuwa shall pay to Mitsuwa Chemical an amount equal to 3% of the FOB price of the plastic parts of the "Licensed Clarion Products" that are sold during the term of the Agreement. cdtech In reply, please be informed that pertinent portion of Article 12 of the RP-Japan Tax Treaty reads, as follows: (1) Royalties arising in Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. (2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the laws of that contracting state, but if the recipient is the beneficial owner of the royalties the taxed so charged shall not exceed: xxx xxx xxx (b) 25 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx Accordingly, the remittance by Clarion Mitsuwa Philippines, Inc. to Mitsuwa Chemical Co., Ltd., of Japan shall be subject to the preferential rate of twenty-five per cent (25%) Philippine income/withholding tax based on the gross amount of the royalties in accordance with the aforequoted provisions of the RP-Japan Tax Treaty. However, the said royalty payments for the right to use technology and technical information shall now be subject to the 10% value-added tax imposed under Section 102 (a) (b) in relation to Section 99 of the Tax Code, as amended by R.A. No. 7716, based on the contract price agreed upon by the parties. As licensee, you shall be responsible for the payment of VAT on such royalties in behalf of Mitsuwa Chemical Co., Ltd., of Japan by filing a separate VAT declaration/return. The said VAT declaration/return can be used by you as evidence in claiming input tax credit. (Section 4.102-1(b), Revenue Regulations No. 7-75, as simplified by Revenue Memorandum Circular No. 23-96; see also BIR Ruling No. 049-96 dated April 11, 1996) This ruling is being 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. (BIR Ruling No. UN-234-94 dated August 2, 1994). aisadc Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)