BIR Ruling [DA-031-97]

January 20, 1997 BIR RULING [DA-031-97] Bengzon Narciso Cudala Pecson Bengson & Jimenez Attorneys & Counselors at Law 6th & 7th Floors, SCL Building 112 Amorsolo Street Legaspi Village, Makati City Attention: Atty . Juris M . Tomboc Gentlemen : This refers to your letter dated June 17, 1996 requesting, on behalf of your client, Philippine EDS Techno-Service, Inc. (PET), for approval of its application for relief from double taxation in accordance with RP-Japan Tax Treaty. cd It is represented that PET is a domestic corporation registered with the BOI on a non-pioneer status; that it has an existing "Technical Service Agreement" with Yazaki for the use of the latter's know-how, technical and other proprietary information for PET's business involving the redesign and reformulation of existing technology related to the manufacture of automotive components and computer-aided design, including the preparation of technical documents, and the subsequent sale of such designs, data or other information resulting therefrom, as well as the rendering of technical services with respect to the manufacture of automotive wiring harnesses and component parts thereof; that YAZAKI, on the other hand, is a corporation duly organized under the laws of Japan, having its principal office of business at 4-28, Mita 1-chome, Minato-ku, Tokyo, Japan; that it has not set up a permanent establishment in the Philippines but merely regional headquarters duly registered with the Securities and Exchange Commission; that it will train PET's personnel so that PET will acquire and master the Yazaki technology; that it will send technical personnel to PET at the latter's request; that an application for registration of the agreement was submitted to the Bureau of Patents Trademarks and Technology Transfer (BPTTT), Department of Trade and Industry (DTI) and was approved subject to certain pre-registration condition as specified by the PTTT in its notice of April 17, 1996; that under the said agreements, PET will pay two (2) types of fees namely: (a) a fee of JY25,000/30,000 a day per personnel dispatched to PET to provide technical assistance to PET and (b) running royalties at the rate of Two Percent (2%) of the Net Sales Proceeds of PET on a quarterly basis in consideration of the disclosures of and the right to use Yazaki technology. In reply, please be informed that Article 12, paragraphs 1 and 2 of the RP-Japan Tax Treaty provides, viz.: "(1) Royalties arising in a Contracting State 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, that tax so charged shall not exceed: "(a) 15% percent of the gross amount of the royalties, if the royalties are paid in respect of the use or the right to use cinematographic films and films or tapes for radio or television broadcasting; and "(b) 25% percent of the gross amount of the royalties in all other cases. "xxx xxx xxx" The term "royalties" has been defined under the RP-Japan Tax Treaty as follows: "(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, including cinematographic films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific experience." Section 36, paragraph 4 of the Tax Code, as amended, provides in part as follows: "Sec. 36. Income sources within the Philippines . xxx xxx xxx "(a) Gross income from sources within the Philippines. xxx xxx xxx "(4) Rentals and royalties . "(A) the use of the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; "(B) the use of, or the right to use in the Philippines any industrial, commercial or scientific equipment; "(C) the supply of scientific, technical, industrial or commercial knowledge or information; "(D) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (A), any such equipment as is mentioned in paragraph (B), or any such knowledge or information as is mentioned in paragraph (C); or "(E) the supply of services by a non-resident person or his employees in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from, such nonresident person; "(F) technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; xxx xxx xxx In the instant case, Yazaki is a foreign corporation not engaged in trade or business in the Philippines as envisioned under Section 25(b) of the Tax Code, as amended. As such, the fees being paid by PET in favor of Yazaki consisting of (1) running royalties at the rate of Two percent (2%) of the Net Sales Proceeds of PET on a quarterly basis in consideration of the disclosures of and the right to use Yazaki technology; and (2) a fee of JY25,000/30,000 a day per personnel dispatched to PET to provide technical assistance to PET, are in the nature of royalties subject to tax at the rate of 25% applying the aforequoted provisions of Article 12, paragraphs 1, 2, and 4 of the RP-Japan Tax Treaty . In other words, the fee is being paid by PET to Yazaki for the dispatch of Yazaki's technical personnel to provide technical assistance to PET should likewise be considered embraced" within the meaning of the term "royalty" since the same is transfer of know-how subject of the aforesaid "technical Service Agreement" between Yazaki and PET. Such being the case, your opinion that the fees (the fee for the dispatch of Yazaki's technical personnel to provide technical assistance to PET and the fee in consideration of the disclosures of and the right to use Yazaki technology) paid to Yazaki by PET are subject to the royalty tax rate of 25% as prescribed under Article 12 (2)(b) of the RP-Japan Tax Treaty is hereby confirmed. Furthermore, the said royalty payments made by PET to YAZAKI shall be subject to the 10% VAT imposed under Section 102(a)(2) 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. Being the licensee, PET shall be responsible for the payment of VAT on such royalties in behalf of Yazaki by filing a separate VAT declaration/return. The said VAT declaration/return can be used by PET as evidence in claiming input tax credit. (Sec. 4.102-1(b), Rev. Regs. No. 7-95, as amplified by RMC No. 23-96; see also BIR Ruling No. 49-96 dated April 11, 1996) cdta Very truly yours, ALICIA P. CLEMENO Assistant Commissioner Legal Service By: ALICIA L. TOMACRUZ Head Revenue Executive Assistant (Legal Service)