BIR Ruling [DA-306-99]

May 18, 1999 BIR RULING [DA-306-99] Sekisui Jushi Philippines Corporation Lot 11 Phase II Camelray Industrial Park Canlubang, Calamba, Laguna Attention: Ms. Andrea V. Suelto Treasurer/Gen. Affairs Manager Gentlemen : This refers to your letter dated December 2, 1998 requesting for a ruling that the royalties to be paid by Sekisui Jushi Philippines Corporation to Sekisui Jushi Corporation in Japan be subject to the preferential tax rate prescribed under the RP-Japan Tax Treaty. It is represented that Sekisui Jushi Philippines Corporation (SJPC) is a domestic corporation engaged in the business of manufacturing, importing, exporting, buying, selling or otherwise dealing in, at wholesale such goods as strapping bands and other packaging materials and goods of similar nature; that Sekisui Jushi Corporation (SJC) is a Japanese Corporation engaged in the business of manufacturing and marketing throughout the world, of a wide range of product lines that include packaging material, solar powered traffic safety products, consumer goods and home appliances, as well as industrial and commercial products; that SJPC entered into a Management Consulting Agreement with SJC whereby the latter shall furnish SJPC the following advice, assistance and services: "a. Assistance in the general management; "b. Advice and assistance in establishment and operation of the company; aESHDA "c. Advice and assistance in construction and operation of the factory; "d. Support and assistance in strengthening the business relation with SJC" and that as a consideration of the aforementioned services rendered by SJC, SJPC shall pay consulting fees in the amount of US$4,333 per month. In reply, please be informed that Article 12(2) and (4) of the RP-Japan Tax Treaty provides, viz: "Article 12 "1. Royalties arising in a 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 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 of or the right to use cinematograph films and films or tapes for radio or television broadcasting; (b) 25 percent of the gross amount of the royalties in all other cases. "(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. SDEHCc "(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 cinematograph 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." Such being the case, the consultancy fees paid to SJC by SJPC, which is within the contemplation of the term "royalties", shall be subject to 25% Philippine income/withholding tax based on the gross amount of royalties. (BIR Ruling Nos. DA-30-98 dated February 2, 1998; UN-234-94 dated August 4, 1994; DA-435-96 November 21, 1996) Moreover, pursuant to Section 4.102-1(b) of Revenue Regulations No. 7-95, "the VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return for this purpose, The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee ." (Emphasis supplied) Such being the case, the royalties paid by SJPC to SJC shall be subject to the 10% VAT which SJPC shall pay in behalf of SJC, and the validated VAT returns shall be sufficient evidence for SJPC to claim the input tax on said royalties as credit against its output VAT liability. [BIR Ruling No. 49-96 dated April 11, 1996] CASaEc This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group