Royalty Payments Made under License and Technical Assistance Agreement Subject to Preferential Tax Rate

March 30, 1999 BIR RULING NO. 042-99 000-00-042-99 PunongBayan & Araullo 6th Floor, Vernida IV Building Alfaro Street, Salcedo Village Makati City Attention: Atty . Vic C . Mamalateo Gentlemen : This refers to your letter dated December 3, 1998 requesting on behalf of your client, Mitsubishi Heavy Industries Philippines, Inc. (MHIPI), for a ruling that the payments made by MHIPI to Mitsubishi Heavy Industries, Ltd. (MHIL) under the License and Technical Assistance Agreement (Agreement) are subject to the royalty tax rate of 25% pursuant to the RP-Japan Tax Treaty. It is represented that MHIL is a corporation duly organized and existing under the laws of Japan; that it entered into an Agreement with MHIPI, a corporation duly organized and existing under the laws of the Philippines; that under the said Agreement, MHIL shall grant MHIPI a license to manufacture in the Philippines, automobile air conditioning systems and spare or replacement parts developed or made by MHIPI (Products) by assembling components or parts for incorporation into the Products which MHIPI manufactured or procured or was purchased by MHIPI from MHIL; that in addition, MHIPI was granted a license to use and sell the Products to Mitsubishi Motors Philippines Corporation, a Philippine automobile manufacturer; Likewise, MHIPI may sell to any other third party with the consent of MHIL will provide the drawings, specifications, parts list, service manuals and technical services related to the manufacture or servicing of the Products together with the patents, utility models and other intellectual property rights with respect to the Products which MHIL owns; and that in support of your request, you submitted the following documents: (1) BIR Form No. TC-001; (2) Certified True Copy of the Agreement (3) Certificate of the Articles of Incorporation and By-Laws of Licensor; (4) Certificate of the Articles of Incorporation and By-Laws of Licensee; (5) BIR Registration Certificate of Licensee In reply, please be informed that Article 12(2)(b) and (4) 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: "(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. . . . "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 cinematographic 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. xxx xxx xxx Based on the foregoing, this Office is of the opinion that the payments made by MHIPI to MHIL for the right to use its industrial knowledge and experience in manufacturing automobile air conditioning systems and parts under the inventions, drawings, specifications and other manufacturing and/or servicing information that it has gained over the years under the aforementioned Agreement shall be subject to the preferential tax rate of 25% under Article 12(2)(b) of the RP-Japan Tax Treaty. However, the remittance by MHIPI to MHIL 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, MHIPI shall, before making payments of royalties to MHIL, withhold and remit to this Bureau the 10% VAT due thereon by filing a separate VAT return for and in behalf of MHIL. (Sec. 4.110-3(b), 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