Whether Technical Assistance Fees Paid to Mitsubishi Motors Corporation (MMC) are Subject to the Royalty Tax Rate of 10% since the Payor is a BOI-Registered Enterprise on a Preferred Pioneer Status

January 21, 1994 BIR RULING NO. 026-94 36 (a) 31-90 026-94 Sycip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Mr . R . R . Rubio Gentlemen : This refers to your letter dated November 24, 1991 requesting in behalf of your client, Asian Transmission Corporation (ATC), confirmation of your opinion that technical assistance fees paid to Mitsubishi Motors Corporation (MMC) are subject to the royalty tax rate of 10% since your aforenamed client is a BOI-registered enterprise on a preferred pioneer status. It is represented that ATC has an existing "Manufacturing, Patents and Technical Assistance Agreement" with MMC for the manufacture of transmission assembly, component parts and engine assembly; that this activity is registered with the BOI on a preferred pioneer status; that the agreements are registered with the Bureau of Patents, Trademarks and Technology Transfer, Department of Trade and Industry; that under the said agreements, ATC pays two (2) types of fees; (a) a fee (P45,000/40,000 per personnel dispatched) for the dispatch of MMC's technical personnel to provide technical assistance to ATC on the basis of number of days stay in the Philippines (minimum of one week but not to exceed an aggregate of six months in one taxable year) and (b) a fee "in consideration of the technical assistance and other benefits . . . granted or agreed to be granted by MMC to ATC" on the basis of 5% FOB price of omission or 5% of net sales minus landed cost of imported component parts, whichever is lower; and that the technical assistance fees paid to MMC personnel is recorded under the Cost of Goods Sold account and is subjected to the 30% withholding tax while the second type of fee is booked as "royalty fees" under operating expenses and subjected to the 10% withholding tax. cdtech In reply, please be informed that Article 12 (3) and (4) of the RP-Japan Tax Treaty provides, viz: "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 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." In the instant case, MMC is a foreign corporation not engaged in trade or business in the Philippines as envisioned under Section 25(b) of the Tax Code, as amended. As such, the fees being paid by ATC in favor of MMC consisting of: (1) the fee "in consideration of the technical assistance and other benefits granted by MMC to ATC" on the basis of 5% FOB price of omission or 5% of net sales minus landed cost of imported component part, whichever is lower; and (2) the fee for the dispatch of MMC's technical personnel to provide technical assistance to ATC, on the basis of number of days stay in the Philippines, which is a minimum of one week but not to 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 ATC in favor of MMC for the dispatch of MMC technical personnel to provide technical assistance to ATC should likewise be considered embraced within the meaning of the term "royalty" since the dispatch of MMC's technical personnel to provide technical assistance to ATC is transfer of know how subject of the aforesaid Manufacturing, Patents and Technical Assistance Agreement between MMC and ATC. Such being the case, your opinion that the fees (the fee for the dispatch of MMC's technical personnel to provide technical assistance to ATC and the fee in consideration of the technical assistance and other benefits) paid to MMC by ATC are subject to the royalty tax rate of 10% as prescribed under Article 12(3) of the RP-Japan Tax Treaty is hereby confirmed. aisadc Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue