BIR Ruling [DA-382-98]

August 24, 1998 BIR RULING [DA-382-98] Futaba Corporation of the Philippines 120 North Science Avenue Laguna Technopark Special Export Processing Zone Bian, Laguna Attention: Mr . Shoji Arai Director/Treasurer Gentlemen : This refers to your letter dated July 31, 1997 requesting for a ruling that remittance of royalty and interest by your company, Futaba Corporation of the Philippines (FCP), in favor of Futaba Corporation (FC), a Japanese corporation, is subject only to the preferential tax rate of 25% and 15% Philippine income/withholding tax, respectively, pursuant to the RP-Japan Tax Treaty. cdt It is represented that FCP is a corporation duly organized and existing under the laws of the Philippines; that on October 17, 1996, it has entered into a Technical Assistance and Licensing Agreement with FC, a Japanese corporation with principal office address at 629 Oshiba, Moraba-Shi, Chiba 297, Japan; that FC owns the Manufacturing Technology and Patents for vacuum flourescent displays and the related parts and products (Products); that it sells the products with the FC Trademarks; that FC grants to FCP a non-exclusive right to manufacture the products using the Manufacturing Technology and Patents and the non-exclusive right to sell the products with the Trademarks which were manufactured using the Manufacturing Technology and Patents; that in no case shall FCP change or amend the trademarks attached to the products; that FC shall provide FCP with the Manufacturing Technology to manufacture the products; that FC shall likewise supply machinery and equipment to FCP to manufacture the products and in turn FCP shall purchase such machinery and equipment; that when requested by FCP, FC shall dispatch its engineers to FCP's facility during the term of this agreement for the purpose of executing the Manufacturing Technology and supervising the manufacturing activities; that FCP shall pay to FC a royalty fee which is 5% of the net sales of the products for the technical assistance within 30 days after the submission of the report of the net sales; that FCP shall make the payment in US dollars based on the exchange rate prevailing in the last day of the preceding month of the payment; that FCP shall pay to FC the net amount of the royalty fees after deducting withholding taxes and the VAT based on the tax regulations of the Republic of the Philippines; that FCP agrees that the Patents, Trademarks and the Manufacturing Technology which are granted and provided by FC during the term of this agreement are considered FC's property; that FCP shall assume all responsibilities for the management of such property, but shall have no right to grant the execution right over them to any third party without FC's prior written consent; that FCP shall not disclose the term of this agreement to any third party, except when requested by the Government of the Philippines; that during the term of this agreement, FCP must not use the Manufacturing Technology to manufacture any product without FC's prior written consent nor shall attach the Trademarks to products other than the products defined herein without FC's prior written consent; that whenever FCP makes any improvement in the products during the term of this agreement, the same shall be disclosed to FC subject to the payment of mutually agreed fees; that FCP may not transfer its rights and obligations under this agreement to any third party; that FCP and FC may amend or change the provisions of this agreement subject to the prior approval of the Technology Transfer Registry; and that this agreement shall be continuously effective for 10 years from the date of signing with no automatic renewal, subject to the prior approval of the Technology Transfer Registry, the parties may renew this agreement within 6 months prior to the expiration date. On the other hand, a Loan Agreement was made and entered into by and between the same parties, whereby FCP has requested FC to provide funds in the amount of Two Billion Two Hundred Million (2,200,000,000) Japanese Yen to finance the construction of buildings and the acquisition of machinery and furniture for FCP's new factory; that FCP shall pay interest on the Loan; that the Loan shall be for a term of four (4) years, and the principal amount of the Loan shall be repaid in six (6) installments as follows: Due Date(s) Repayments Amounts (Japanese Yen) June 14, 1997 250,000,000 December 14, 1997 250,000,000 June 14, 1998 350,000,000 December 14, 1998 350,000,000 June 14, 1999 500,000,000 December 14, 1999 500,000,000 Total 2,200,000,000 =========== provided that, if any due date falls on a day on which the banks are not open for business in Metro Manila, payment shall be made on the immediately succeeding day that banks are open for business in Metro Manila, and such payment day will then constitute the corresponding due date(s) and in such case the extension shall be included in the computation of payment of interest; that FCP, at his option may prepay the Loan without prepayment penalty, provided that the full amount of the principal, together with interest due up to the date of actual prepayment is tendered to FC in writing; that all payments to FC under this agreement shall be remitted by FCP, net of applicable Philippine withholding taxes, and be paid only in Japanese Yen and credited to FC's account not later than the due date(s); that if FCP shall at any time pay to FC an amount which is less than the full amount of all sums then due and payable to FC, FC shall be entitled to allocate and apply the amount so paid to or towards the outstanding sums in such order as FC in its sole discretion may decide; that in the event that FCP fails to pay the loan(s) when due, penalty in addition to interests due, shall be charged at the rate of one percent (1%) per month, compounded monthly; and that if any of the following events ("Events of Default") shall occur: (a) FCP shall fail to pay the principal of, or interest on, the Loan as and when due and payable; (b) The documents and papers furnished at any time under or in connection with this agreement, shall be proven to be false or incorrect in any material respect on or as of the date made or deemed made; (c) FCP shall fail to perform or observe any term, covenant or stipulation contained in this Agreement or in the other relevant documents. (d) Breach of any of FCP's representation and warranties contained in this agreement. (e) FCP shall (i) fail to pay any indebtedness for borrowed money, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise); or (ii) fail to perform or observe any term, covenant, or condition on his part to be performed or observed under any agreement or instrument relating to any such indebtedness, when required to be performed or observed; or any such indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (f) FCP (i) shall admit in writing its inability to pay his debts as when such debts become due; or (ii) shall make an assignment for the benefit of creditors, petition or apply to any court or tribunal for the appointment of a custodian, receiver, or trustee for the substantial part of its assets; or (iii) shall commence any proceeding under any bankruptcy, arrangements, readjustment of debt law or statute of any jurisdiction, whether now or hereafter in effect; or (iv) shall have any such petition or application filed or any such proceeding commenced against it in which an order for relief is entered or adjudication or appointment is made and which remains undismissed for a period of 180 days or more; or (v) by an act or omission shall indicate its consent to, approval of, or acquiescence in any such petition, application, or proceeding or order for relief or the appointment of a custodian, receiver or trustee for all or any substantial part of its properties; (vi) shall suffer any such custodianship, receivership, or trusteeship to continue undischarged for a period of 30 days or more; then, and in any such event, FC may, by written notice to the FCP, declare the total amount of the Loan and all interests and/or penalty thereon, to be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by FCP. In reply, please be informed that pertinent portion of Article 12(2)(b) of the RP-Japan Tax Treaty reads, as follows: "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) . . . "(b) 25 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx" Accordingly, the remittance of royalties by FCP to FC shall be subject to the preferential tax rate of 25% Philippine income/withholding tax in accordance with the aforequoted provisions of the RP-Japan Tax Treaty. (BIR Ruling No. 117-95 dated November 7, 1985) Moreover, the remittance by FCP to FC of the said royalties shall be subject to the 10% value-added tax pursuant to then Section 102(a)(1) of the Tax Code, as amended by Republic Act No. 7716, as last amended by Republic Act No. 8241 [now Section 108(A)(1) of the Tax Code of 1997]. Furthermore, 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 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. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) In view thereof, FCP shall, before making payment of royalties to FC, withhold and remit to this Bureau the 10% VAT due thereon, by filing a separate VAT return for and in behalf of FC (Sec. 4.110-3(b), Ibid). Moreover, Article 11(2)(b) of the RP-Japan Tax Treaty, pertinent portion of which reads thus "ARTICLE 11 "(1) . . . "(2) However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: "(a) . . . "(b) 15 per cent of the gross amount of the interest in all other cases. xxx xxx xxx" Accordingly, the remittance of interest arising from the Loan Agreement entered into by FCP and FC shall be subject to the preferential tax rate of 15% in accordance with the aforequoted provisions of the RP-Japan Tax Treaty. (BIR Ruling No. 138-94 dated September 19, 1994) 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, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)