BIR Ruling [DA-361-99]

June 22, 1999 BIR RULING [DA-361-99] FCC (Philippines) Corporation 106 North Science Avenue Laguna Technopark Bian, Laguna Attention: Ms . Susan C . Lansangan Accounting Manager Gentlemen : This refers to your letters dated December 27, 1995, January 31, 1996 and November 23, 1998 requesting for a ruling that royalty payments made by FCC (Philippines) Corporation (FCC Phils.) to FCC Co. Ltd. of Japan (FCC Japan), are subject to the preferential tax rate of 10% under RP-Japan Tax Treaty. It is represented that FCC Phils. is a newly operating EPZA-registered enterprise based in the Special Export Processing Zone of Laguna Technopark in Bian, Laguna; that it is engaged in the manufacture of clutch parts for one-hundred percent export to Japan; that FCC Phils. is also a grantee of a pioneer status by virtue of EPZA's Board Resolution No. 95-102 dated April 26, 1995; that it has a ten-year License Agreement with FCC Japan and its registration with the Bureau of Patents, Trademarks and Technology Transfer (BPTTT) is approved on March 29, 1995; that as licensee, FCC Phils. shall pay royalties according to the terms stipulated in the Agreement; and that in support of your request, you submitted the following documents: 1) EPZA Certificate of Registration; 2) Certificate of EPZA Board Resolution granting pioneer status; and 3) Certificate of BPTTT registration. In reply, please be informed that Article 12 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; Additionally, FCC Japan is liable to a 10% value-added tax (VAT) on the royalties remitted to it by FCC (Phils.) pursuant to Section 4.102-1(b) of Revenue Regulations No. 7-95, as amended, which provides as follows: "The VAT on rentals 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." 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)