Payment of Royalties by BOI-Registered Firm Engaged in Preferred Areas for Investment Subject to 10% Preferential Tax Rate

March 30, 1999 BIR RULING NO. 038-99 000-00-038-99 Bengzon Narciso Cudala Jimenez Gonzales & Liwanag SOL Building, 112 Amorsolo Street Legaspi Village Makati City Attention: Atty . Hubert E . Molina Gentlemen : This refers to your letter dated August 28, 1998 requesting on behalf of your client, Technol Eight Philippines Corporation (TEP), for an application of the preferential tax rate of 10% on the gross amount of royalties to be paid to Technol Eight Co., Ltd. (TEC), a non-resident foreign corporation domiciled in Japan, pursuant to Article 12(3) of RP-Japan Tax Treaty. LibLex It is represented that TEP is a domestic corporation organized and existing under and by virtue of Philippine laws with principal place of business at 127 East Main Avenue, Laguna Technopark Special Economic Zone, Bian, Laguna; that TEP is likewise registered with the Board of Investments (BOI) as a new producer on pioneer status with Certificate of Registration No. DP-97-231 dated October 21, 1997; that TEP is engaged in the business of manufacturing, producing, designing, purchasing, procuring, distributing, selling, exporting, or otherwise dealing on wholesale in metal parts and components of various types of motor vehicles (such as passenger automobiles, vans, trucks and buses) audio/video equipment (such as televisions, video cassette recorders, audio cassette decks), office equipment (such as computers and peripherals of computers, copy machines), communication equipment (such as telephone, facsimiles), electric home appliances (such as refrigerators, air conditioners, washing machines, ranges, ovens, toasters, dishwashers), other household apparatuses (such as kitchen systems, bath systems, sinks), and other machinery/instruments, as well as tools and dies of such metal parts and components, and to do all things required for or incidental to the manufacture, production, packing, storage, warehousing, or disposition thereof, including but not limited to purchase, acquisition, importation and handling of raw materials, components, accessories and related items; that TEC, on the other hand, is a non-resident foreign corporation domiciled in Japan with business address at 1 Akatsuki-cho, Seto, Aichi, Japan; that TEC is not engaged in business nor does it have a branch or a permanent establishment in the Philippines; that on May 28, 1998, TEP and TEC executed a Technical Assistance Agreement whereby TEC shall furnish/provide TEP with technical know how, technical information, technical assistance and technical service in connection with metal stamping; that in consideration thereof, TEP shall pay TEC a royalty of 3.5% of net sales (excluding die and checking fixture) plus engineering service fees; that the said percentage pertaining to net sales shall be effective for three (3) years from the date of execution after which period it shall be reviewed by the parties; that said agreement was applied for registration with the Intellectual Property Office (IPO), Department of Trade and Industry (DTI); and that on August 12, 1998, the IPO issued a Certificate of Compliance No. 5-1998-00046 under the provisions of the Intellectual Property Code. In reply, please be informed that Article 12 of RP-Japan Tax Treaty, reads: "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 royalties. xxx xxx xxx" Such being the case, since TEP is duly registered with the BOI and engaged in preferred areas for investment under the investment incentives laws of the Philippines, the payment of royalties by TEP to TEC will be subject to the preferential tax rate of 10% Philippine income tax based on the gross amount of royalties. However, the remittance by TEP to TEC of the said royalties shall be subject to the 10% value-added tax pursuant to Section 108 (A)(1) of the Tax Code of 1997. Moreover, 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, TEP shall, before making payment of royalties to TEC, withhold and remit to this Bureau the 10% VAT due thereon by filing a separate VAT return for and in behalf of TEC. (Sec. 4.110-3(b) of Revenue Regulations No. 7-95) 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.) BEETHOVEN L. RUALO Commissioner of Internal Revenue