DA ITAD BIR Ruling No. 060-06

May 30, 2006 DA ITAD BIR RULING NO. 060-06 Philippines-Japan Tax Treaty, Article 10; BIR Ruling No. ITAD-89-04 Sagara Metro Plastic Industrial Corporation Barangay Paciano Rizal, Calamba, 4027, Laguna Attention: Mr. Nobuatsu Sekino, President Ms. Lilibeth Lourdes De Asis, Finance & Accounting Manager Gentlemen : This refers to your letter dated September 21, 2005 requesting relief from double taxation on royalty payments to Sagara Plastics Industrial Company, Ltd. (Sagara Plastic) by Sagara Metro Plastics Industrial Corporation (Sagara Metro), Inc. under the Philippines-Japan tax treaty. It is represented that Sagara Plastic is a nonresident foreign corporation organized and existing under the laws of Japan with business address at 1120 Hirooka Fukuroi-shi Shizuoka-Ken, Japan; that it is not registered either as a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 9, 2005; that Sagara Metro is a corporation organized and existing under the laws of the Philippines with its place of business at Barangay Paciano Rizal, Calamba, Laguna; that Sagara Metro is registered with the Board of Investments (BOI) as non-pioneer under Certificate of Registration Nos. EP 2005-024 (February 16, 2005); EP 99-104 (August 11, 1999); EP 93-250 (September 9, 1993); EP 93-352 (November 16, 1993); that Sagara Metro is primarily engaged in the manufacture of industrial plastic products and tubes, including plastic components for automotive wiring harness, as well as in selling, exporting, and distributing the same in certain territories; that Sagara Plastic is engaged in the business of manufacturing, selling and distributing various industrial plastic products and tubes, as well as related tools and dies; that Sagara Metro and Sagara Plastic entered into a License and Technical Assistance Agreement dated December 1, 2000 which was registered with the Philippine Intellectual Property Office (IPO) under Certificate of Compliance No. 5-2001-00026 on February 21, 2001, which shall be effective for a period of five (5) years commencing on January 2, 1999 up to and until January 2, 2004, and shall be renewable subject to the approval of, and registration with, the Technology Transfer Registry of the IPO and, if required, by the Bangko Sentral ng Pilipinas; that under the Agreement, Sagara Plastic agreed to furnish Sagara Metro know-how, technical information and license to make, use, and sell licensed products, including the furnishing of technical advisory services, assistance in export of products and training of Sagara Metro's personnel; that in consideration of the foregoing, Sagara Metro agrees to pay to Sagara Plastic an amount ranging from Two Percent (2%) to Five Percent (5%) of the net sales price of the products manufactured and sold plus a bonus royalty ranging from One-half percent (0.5%) to two (2%) of net foreign exchange earnings by Sagara Metro during the period of the Agreement. In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides: "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 claimed shall not exceed: IAcTaC a) 15 per cent 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 per cent 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 per cent 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. xxx xxx xxx Based on the aforecited, royalty payments will be taxed at the preferential tax rate of ten percent (10%), if the payor is a BOI-registered enterprise and engaged in preferred pioneer areas of investment; fifteen percent (15%) if the payments are in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; and in all other cases, twenty-five percent (25%) of the gross amount of the royalties. Such being the case and since Sagara Plastic is a not a BOI-registered enterprise engaged in preferred pioneer areas of investment and that its payment of royalties to Sagara Metro are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the said royalty payments are subject to the preferential tax rate of twenty five per cent (25%) of the gross amount of royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-98-05 dated September 7, 2005) This ruling is issued based on the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service