ITAD BIR Ruling No. 273-12

June 29, 2012 ITAD BIR RULING NO. 273-12 Article 12, Philippines-Japan tax treaty, as amended JUNTEC Corporation Block 5, Lot 7, LIIP-PEZA Barangay Mamplasan, Bian Laguna Attention: Mr. Nilo A. Alinsangan Managing Director Gentlemen : This refers to your letter dated June 22, 2009, on behalf of HONKO Seikosho Co.,Ltd. (hereinafter referred to as "HONKO") requesting confirmation that the royalty payments of your company, JUNTEC Corporation (hereinafter referred to as "JUNTEC") to HONKO pursuant to a Technical Assistance Agreement are subject to 10 percent final tax under Article 12, paragraphs 2 and 3 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") ,as amended by a Protocol. 1 It is represented that HONKO is a non-resident corporation duly organized and existing under the laws of Japan with address at 5-13-42, Tsunashima-Nishi, Kohoku-ku, Yokohama, Kanagawa Prefecture, Japan and is a resident thereof as evidenced by the Certificate of Status of Taxable Person issued by the District Director of Kanagawa Tax Office dated April 3, 2009; that it is not registered as a corporation nor as a partnership in the Philippines per a Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 3, 2009; that on the other hand, JUNTEC is a corporation duly organized and existing under Philippine laws and is Registered with the Philippine Economic Zone Authority under Certificate of Registration No. 96-119 issued on December 19, 1996, engaged in the manufacture and assembly of metal parts and components for Floppy Disk drives and Car Audio Systems. It is further represented that on January 8, 2008, a TECHNICAL ASSISTANCE AGREEMENT (hereinafter referred to as "Agreement" ) was entered into by and between JUNTEC and HONKO; that HONKO has an exclusive license to use certain Technical Information 2 concerning the manufacture and assembly of component parts for floppy disk drives, car audio equipment and related information system equipment; that JUNTEC desires to receive technical assistance from HONKO for the manufacture and assembly of component parts for floppy disk drives, car audio equipment and the manufacture of other related products; that pursuant to the Agreement, HONKO desires, and is willing, to provide said technical assistance which in its Article 3 (Scope of Assistance and Services) includes, among others, the following: cCESaH (a) HONKO shall, upon written request by JUNTEC, accept a reasonable number of JUNTEC's engineers, with adequate knowledge of the English language, at its Designated plants in Japan, for the purpose of imparting technical advice on the Manufacturing process and sales of Product 3 and provide training for as long as is Deemed necessary by the parties hereto upon consultation; (b) HONKO shall, upon written request by JUNTEC, dispatch its engineers to JUNTEC's plant for a period of time deemed necessary for the purpose of rendering advice and other instruction on the manufacture and sales of Product; but in no case shall any of HONKO's engineers individual stay in the Philippines exceed, in the aggregate, 183 days in any calendar year nor shall said period or periods, insofar as all of HONKO's engineers stay in the Philippines aggregate more than six (6) months in any taxable year; (c) HONKO's assistance shall include assistance in plant construction, (excluding actual construction work and practice of any licensed professional),selection, procurement, set up, installation and operation of machines, quality control, raw materials procurement and advice on sales. It is also represented that as consideration for the license granted under the Agreement, JUNTEC shall pay HONKO a running royalty equivalent to 5% of the net sales amount of Product; that Agreement shall be for a term of five (5) years and shall remain effective beginning January 1, 2008 up to the end of December of the year 2013. It is finally represented that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. AScHCD In reply, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") ,any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau at least 15 days before the intended transaction or payment of income, thus: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e.,payment of dividends, royalties, etc.,accompanied by supporting documents justifying the relief ..." (Emphasis ours) In view of the foregoing, considering that the Agreement was entered into on January 8, 2008 but the subject TTRA was filed only on June 22, 2009, in violation of the 15-day period prescribed under RMO 1-2000, this Office hereby DENIES relief on payments made before July 7, 2009 (15-day prescriptive period). Accordingly, said payments made prior to July 7, 2009 shall be subject to income tax at the rates provided under Sections 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. ... (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)" ICHDca However, with respect to payments made on July 7, 2009 and thereafter, this Office hereby GRANTS relief on the payments pursuant to Article 12 the Philippines-Japan tax treaty, as amended, which you invoked, may apply to the instant case. It 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 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) 10 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 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 used, 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." aHCSTD In view of all of the foregoing, this Office is of the opinion and so holds that the subject royalty payments beginning July 7, 2009 made by JUNTEC to HONKO under the Agreement are subject to tax at a rate not exceeding 10 percent based on the gross amount of the royalty, pursuant to Article 12 of the Philippines-Japan tax treaty, as amended. Moreover, the royalties paid to HONKO are subject to the 12 percent VAT pursuant to Section 108 of the Tax Code of 1997, as amended. Accordingly, JUNTEC, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such fees before making any payment to HONKO. In remitting the VAT withheld, JUNTEC shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & 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 to be applied against the output tax that may be due from JUNTEC if it is VAT-registered taxpayer. In case it is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or as an "asset", whichever is applicable. In addition, it is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate, the first three copies for HONKO and the fourth copy for JUNTEC as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) This ruling is issued on the basis of the 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending 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 effective January 1, 2009. 2. Technical Information means all the know-how and technologies necessary for the manufacture and sales of Product and other technical or business information, including those concerning presses and assembly, managed or owned by HONKO. 3. Product means a product of a specific model or type designated by HONKO and selected by the parties hereto through prior consultation and agreement.