Semi-Annual Remittances of Philippine Iino Corporation to Iino Seisakusho Co. Ltd. of Japan as Rental Payments for the Use of ISCL's Machineries and Equipment Subject the 7.5% Withholding Tax

July 11, 1997 BIR RULING NO. 078-97 28 (B) (4) 000-00 078-97 SGV & Co. Philamlife Building Jones Avenue, Cebu City Attention: Mr . Lauris L . dela Pea Gentlemen : This refers to your letter requesting for confirmation of your opinion that the semi-annual remittances of Philippine Iino Corporation (PIC) to Iino Seisakusho Co. Ltd. of Japan (ISCL) as rental payments for the use of ISCL's machineries and equipment are subject the 7.5% withholding tax prescribed under Section 25(b) (4) of the Tax Code, as amended. It is represented that your client, PIC, is a corporation organized and existing under Philippine laws with principal office address at Mactan Export Processing Zone, Lapu-Lapu City; that it is a wholly owned subsidiary of ISCL; that ISCL, on the other hand, is a non-resident foreign corporation organized and existing under the laws of Japan with principal office address at Jyunou-Chou 1-135, Omiyashi, Saituma-kus, 330 Japan; that PIC is a manufacturer and exporter of knockpins and other vehicle parts and goods of similar nature and any and all equipments, materials and supplies used or employed or related therewith; that to augment the machineries and equipment used in the manufacturing and processing of its products, PIC entered into two (2) Contracts of Lease with ISCL to use twelve (12) units of FA 10 High Speed Precision Automatic Latches and twelve (12) units 2012 DA Automatic Bar Feeders; that in consideration thereof, PIC shall pay for the 2 Contracts a total of 4,380,000 semi-annually to ISCL; that the first contract commenced on April 1, 1994 and the second contract on October 1, 1994 at 1,950,000 and 2,430,000, respectively. It is contended that BIR Ruling No. UN296-94 dated October 19, 1994 ruled that the abovementioned rental payments may be covered by the term "royalties" as defined in paragraph 4 of Article 12 of the RP-Japan Tax Treaty Convention, and as such shall be subject to the preferential rate of 25% Philippine income/withholding tax. However, Section 25(b) (4) of the Tax Code imposes a reduced tax rate of 7.5% to non-resident lessors of aircrafts, machineries and other equipments. Hence, it is your opinion that the 25% preferential rate invoked in the RP-Japan Tax Treaty may not be applied in this case as the applicable National Law (NIRC) of the Philippines has specifically provided for a lower rate of 7.5%. cdta In reply, please be informed as follows: (1) Section 25(b) (4) of the Tax Code, as amended, which states: "Sec. 25. Rates of tax on foreign corporations . xxx xxx xxx b. Nonresident foreign corporations. xxx xxx xxx (4) Nonresident lessors of aircrafts, machineries and other equipment . Rentals, charter and other fees derived by non-resident lessors of aircrafts, machineries and other equipment shall be subject to a tax of not less than 5% but not more than 10% to be fixed and determined by the President upon recommendation of the Secretary of Finance; provided, that the rate of 7.5% shall be imposed on such rentals, charter and other fees until such time as the President shall have prescribed the rates appropriate for each category or property. (2) BIR Ruling No. UN296-94 dated October 19, 1994, this Office ruled that the rentals on said machineries and equipment are covered by the term "royalties" as defined in paragraph 4, Article 12 of the RP-Japan Tax Treaty, pertinent portions of which read thus "Article 12 (1) Royalties arising in a Contracting State and paid to 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: xxx xxx xxx (b) 25 percent of the gross amount of the royalties in all other cases. xxx xxx xxx (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, article 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." Accordingly, this Office hereby confirms your opinion that the semi-annual remittances of your client, PIC, to Iino Seisakusho Co. Ltd. shall be subject to the 7.5% withholding tax pursuant to Section 25(b) (4) in relation to Section 50 (a) both of the Tax Code, as amended, the same not having exceeded the 25% rate imposed under the said treaty. However, PIC shall be responsible for the payment of value-added tax on such rentals and/or royalties in behalf of Iino Seisakusho Co. Ltd. by filing a separate VAT declaration/return pursuant to Section 4.102-1(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. cdti Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue