ITAD BIR Ruling No. 198-11

July 21, 2011 ITAD BIR RULING NO. 198-11 Article 12, Philippines-Japan Tax Treaty; BIR Ruling No. 096-81; BIR Ruling No. DA-ITAD 065-08; BIR Ruling No. ITAD 098-05; BIR Ruling No. DA-ITAD 060-06; BIR Ruling No. DA-ITAD 102-06 Pilipinas Hino, Incorporated Industrial Park Road Canlubang Industrial Estate Canlubang, Calamba City, Laguna Attention: Ms. Visitacion A. Mejia Accounting Manager Gentlemen : This refers to your letter dated October 5, 2006, requesting confirmation of your opinion that the royalty payments of Pilipinas Hino, Incorporated ("PHI") to HINO MOTORS, LTD. ("HML") are subject to the preferential withholding tax rate of 25 percent, pursuant to Article 12 (2) (b) of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") . It is represented that HML is a corporation organized and existing under the laws of Japan with principal office at 1-1 Hinodai 3 Chome, Hino-shi, Tokyo, Japan per Certificate issued by the Tokyo Chamber of Commerce and Industry dated August 3, 2005; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated January 18, 2007; and that, on the other hand, PHI is a corporation organized and existing under the laws of the Philippines with principal office at Industrial Park Road, Canlubang Industrial Estate, Canlubang, Calamba City. It is further represented that on April 1, 2006, HML, as licensor, and PHI, as licensee, entered into a Technical Cooperation Agreement ("Agreement") , wherein under the said Agreement it was stipulated that: (i) HML grants PHI the manufacturing license for the Licensed Products in the Territory ( i.e. , the Philippines); (ii) The license granted shall be non-exclusive, non-divisible, non-transferable and non-assignable, and shall not include any right to grant sublicenses; (iii) PHI shall not, without HML's prior written consent, enter into an agreement for, or carry out, manufacture or assembly of such vehicles, parts, components or accessories as may be competitive with any HML vehicle or any parts or components thereof; (iv) HML grants PHI the non-transferable right to sell Licensed Products in the Territory; That in consideration of the rights and licenses granted, and technical cooperation furnished by HML to PHI, PHI shall pay HML the following running royalty in the amount and in the manner specified below: (i) With respect to the Licensed Vehicles 1 manufactured by PHI during each half year, PHI shall pay HML a running royalty equivalent to four percent (4%) of the "Local Value Added" of those Licensed Vehicles; (ii) With respect to the unit Local Parts (such as engines, transmissions, steering links and axles), as separately agreed upon by HML and PHI, manufactured by PHI itself during each half year for sale (1) as spare parts for the Licensed Vehicles and/or (2) as original equipment parts and/or spare parts for other vehicles than the Licensed Vehicles, PHI shall pay HML a running royalty equivalent to three percent (3%) of the "Local Value Added" of those unit Local Parts; and cEAHSC (iii) With respect to the Local Parts (except the unit Local parts), exclusive of tires, tubes, and batteries subject to HML's prior written consent, sold by PHI during each half year, PHI shall pay HML royalty at the rate of three percent (3%) of PHI's wholesale or selling prices of those sold (i) as spare parts for the Licensed vehicles and/or (ii) as original equipment parts and/or spare parts for other vehicles than the Licensed Vehicles. It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides as follows: "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 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 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 provisions, royalty payments arising in the Philippines will be taxed at the preferential tax rate of 10 percent, if the payor is registered with the Philippine Board of Investments (BOI) and engaged in preferred pioneer areas of investment in the Philippines; 15 percent, 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, 25 percent of the gross amount of the royalties. Such being the case and since PHI is not a BOI-registered enterprise, and its payments to HML under the Agreement 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 25 percent of the gross amount thereof pursuant to Article 12 (2) (b) of the Philippines-Japan tax treaty. (BIR Ruling No. 096-81 dated June 11, 1981; BIR Ruling No. DA-ITAD 065-08 dated September 10, 2008; BIR Ruling No. DA-ITAD 098-05 dated September 7, 2005; BIR Ruling No. DA-ITAD 060-06 dated May 30, 2006; BIR Ruling No. DA-ITAD 102-06 dated August 28, 2006) Notably, Section 108 of the Tax Code of 1997 states that the lease or use of property or property rights is embraced within the definition of "sale or exchange of services" and is subject to value-added tax ("VAT"). Accordingly, PHI, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 12% final VAT on such royalties before making any payment to HML. In remitting the VAT withheld, PHI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by PHI upon filing its own VAT return, if it is a VAT-registered taxpayer. In case PHI is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, PHI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to HML upon its request and the fourth copy to be retained by PHI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. EAIaHD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "LICENSED VEHICLES" means the vehicles, equivalent to the Licensing Model, manufactured and assembled by PHI in the Philippines under the manufacturing license granted to PHI by MHL in accordance with the Agreement.