Nippon Antenna (Philippines), Inc.

August 8, 2007 BIR RULING [DA-435-07] DA 580-06 Nippon Antenna (Philippines), Inc. B12 L3 & 4, First Cavite Industrial Estate Dasmarias, Cavite Attention: Toshikazu Taira Administrative General Manager Gentlemen : This refers to your letter dated June 4, 2007 stating that Nippon Antenna (Phils.), Inc. is registered with the Philippine Economic Zone Authority (PEZA) pursuant to Executive Order No. 226 and now Republic Act (RA) No. 7916, as amended by RA 8748; that it is engaged in manufacture of car radio antenna and other related product solely for export; that it undertakes its business activities exclusively in First Cavite Industrial Estate, a special economic zone under PEZA; that Nippon Antenna (Phils.), Inc. is wholly owned subsidiary of Nippon Antenna Co., Ltd., a non-resident foreign corporation organized and operating under the laws of Japan; that Nippon Antenna (Phils.), Inc. has been in operation for a period of ten (10) years and is subject to the 5% preferential tax rate on gross income earned from its operations within the Ecozone; that it has signed a License Agreement Contract (Agreement) with Nippon Antenna Co., Ltd.; that this Agreement granted Nippon Antenna (Phils.), Inc. a license to assemble, manufacture, sell and distribute antenna and other related products; and that a corresponding 3% royalty fee shall be paid to the former on the sales generated by Nippon Antenna (Phils.), Inc. from the sale of all its products under the said Agreement. Based on the foregoing representations, you now request for an opinion that the 3% royalty fee paid to Nippon Antenna Co., Ltd. shall be subject to the preferential tax rate of 10% pursuant to Article 12 (3) of the RP-Japan Tax Treaty. In reply thereto, please be informed that Article 12 (2) of the RP-Japan Tax Treaty provides that SECcAI "xxx xxx xxx (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 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 cinematographic 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 per cent of the gross amount of the royalties." (emphasis supplied) Prescinding from the above-cited provisions, it is undisputed that since Nippon Antenna (Phils.), Inc. is not a BOI-registered company engaged in preferred pioneer areas of investment and the royalties involved in this case are not paid in respect of the use of or the right to use cinematographic films and films or tapes for radio or television broadcasting, then the 3% royalties are subject to income/withholding tax equivalent to 25% of the gross amount of such royalty payments pursuant to the provisions of the RP-Japan Tax Treaty. This is in consonance with BIR Ruling No. DA168-98 where this Office ruled that "Such being the case, since the activities conducted by NEC-Phils. does not fall squarely to the circumstances set forth under paragraph 2(a) of Article 12 of the RP-Japan Tax Treaty nor under paragraph 3 thereof, this Office believes therefore, that NEC-Phils. royalty payments to its parent company, NEC-Japan, shall be subject to the 25% income tax on royalties set forth under paragraph (2)(b) of Article 12 of the Tax Treaty which is imposed on all other cases of royalty payments other than those mentioned above, i.e., 10% tax rate on royalty payments." WHEREFORE, in view of the foregoing, this Office holds that the 3% royalty payments to be made by Nippon Antenna (Phils.), Inc. to Nippon Antenna Co., Ltd. pursuant to the said Agreement shall be subject to income/withholding tax at the rate of 25% of the gross amount pursuant to Article 12 (2) (b) of the RP-Japan Tax Treaty. CSIDTc 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service