BIR Ruling [DA-263-96]

July 19, 1996 BIR RULING [DA-263-96] SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty . Cirilo P . Noel Gentlemen : This refers to your letter dated May 20, 1996 requesting in behalf of your client, Southern Cross Cement Corporation (SCCC), confirmation of your opinion that technical assistance fees paid to Tokuyama Corporation (TC) and Chichibu Onada Cement Corporation (COCC) are subject to the royalty tax rate of 10% under the RP-Japan Tax Treaty since client is a BOI-registered enterprise on a preferred pioneer status. cdta It is represented that SCCC is a domestic corporation engaged in the production of cement, an activity which is registered with the BOI on a preferred pioneer status; that SCCC entered into two separate Technical Assistance Agreements with TC and COCC for the purpose of ensuring the successful implementation of the construction of SCCC's Cement Manufacturing Plant to Toledo in Cebu, which is undertaken by Ishikawajima Harima Heavy Industry Co., Ltd.; that the agreements are registered with the Bureau of Patents, Trademarks and Technology Transfer, Department of Trade and Industry; that the technical assistance shall be provided by TC and COCC through the dispatch of their technical personnel to the SCCC's plant site in Cebu for periods not exceeding an aggregate of six months in one taxable year; and that in consideration for the technical assistance to be provided under the Agreements, SCCC will pay TC and COCC each a lump sum amount of Japanese Yen 150,000,000 in six (6) semi annual installment. In reply, please be informed that Article 12(3) and (4) of the RP-Japan Tax Treaty provides, viz: cd "Article 12 "1) . . . "2) . . . "3) Notwithstanding the provisions of paragraph (2), 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 investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the royalties, shall not exceed 10 percent of the gross amount of the 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 including cinematography 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 equipment, or for information concerning industrial commercial or scientific experience." In the instant case, both TC and COCC are foreign corporations not engaged in trade or business in the Philippines as envisioned under Section 25(b) of the Tax Code, as amended, and as such, the technical assistance fees paid by SCCC in favor of TC and COCC, whose technical personnel's number of days stay in the Philippines does not exceed an aggregate of six months in one taxable year, are in the nature of royalties subject to tax at the rate of 10% applying the aforequoted provisions of Article 12(3) and (4) of the RP Japan Tax Treaty. In other words, the fee being paid by SCCC to TC and COCC for the dispatch of their technical personnel to provide technical assistance to SCCC should likewise be considered embraced within the meaning of the term "royalty" since the dispatch of TC and COCC's technical personnel to provide technical assistance to SCCC is transfer of know-how subject to SCCC's two separate Technical Assistance Agreements with TC and COCC. Such being the case, your opinion that the technical assistance fees paid for the dispatch of TC and COCC's technical personnel to provide technical assistance to SCCC are subject to the royalty rate of 10% as prescribed under Article 12(3) and (4) of the RP-Japan Tax Treaty is hereby confirmed. (BIR Ruling no. 026-94 dated January 21, 1994) cdtech Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service) By: ALICIA. L. TOMACRUZ Head Rev. Executive Assistant Legal Service