BIR Ruling [UN-234-94]

August 2, 1994 BIR RULING [UN-234-94] Sycip, Gorres, Velayo & Co. Philamlife Building Jones Avenue, Cebu City Attention: Mr . Carlos V . Jaurigue Tax Division Gentlemen : This refers to your letter dated February 16, 1994 requesting in behalf of your client, Philippine Welding Equipment, Inc. (PWEI), a relief from double taxation on its proposed annual remittance of royalties to Koike Sanso Kogyo, Ltd. of Tokyo, Japan (KSKL) in accordance with the provisions of the RP Japan Tax Treaty. It is represented that PWEI is a domestic corporation organized and existing under the laws of the Philippines, with principal office at Jagobiao, Mandaue City, Cebu; that KSKL is a non-resident foreign corporation organized and existing under the laws of Japan, with principal office located at 4-8 3 Chome, Taihei Sumida Ku, Tokyo, Japan; that PWEI is engaged in the manufacturing and distribution of gas equipment, welding equipment and allied products; that in order to expand its existing product line, PWEI entered into a Technical License Agreement with KSKL to engage in the design, manufacture and production of KSKL products in the Philippines; that in consideration thereof, PWEI shall pay royalties to KSKL at the rate of three percent (3%) of the net sales price of each unit of KSKL product sold; that considering that KSKL has no permanent establishment in the Philippines, the remittance of royalties by PWEI to KSKL shall be subject to preferential rate of 25% Philippine income/withholding tax in accordance with Article 12 of the RP-Japan Tax Treaty. In reply, please be informed that pertinent portion of Article 12 of the RP-Japan Tax Treaty reads 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 per cent of the gross amount of the royalties in all other cases. xxx xxx xxx Accordingly, this Office is of the opinion that the remittance of royalties by PWEI to KSKL shall be subject to the preferential rate of 25% Philippine income/withholding tax in accordance with the above-cited provisions. 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. (BIR Ruling No. 198-85 dated November 7, 1985). cdta Very truly yours, ALICIA P. CLEMENO Acting Assistant Commissioner (Legal Service)