ITAD BIR Ruling No. 322-14

December 15, 2014 ITAD BIR RULING NO. 322-14 Article 12, Philippines-Japan tax treaty, as amended Isuzu Philippines Corporation 114 Technology Avenue Phase II, Laguna Technopark Bian, Laguna Attention: Yuri Kato EVP-Finance and Accounting Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on September 23, 2010, requesting a ruling on royalty payments by ISUZU PHILIPPINES CORPORATION ("Isuzu-Phil") to ISUZU MOTORS LIMITED-Japan ("Isuzu-Japan") , pursuant to Article 12 of the amended 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 Isuzu-Japan is a corporation organized and existing under the laws of Japan with principal address at 26-1, Minami-oi 6-chome, Shinagawa-ku Tokyo, 140-8722 Japan, based on the Certificate of Status of Taxable Person issued by the District Director of Shinagawa Tax Office on January 27, 2010; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 28, 2010; and that, on the other hand, Isuzu-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 114 Technology Avenue Phase II, Laguna Technopark, Bian, Laguna. It is further represented that on June 15, 1999, Isuzu-Phil and Isuzu-Japan entered into a Technical Assistance Agreement ("Agreement") wherein Isuzu-Japan agreed to provide technical assistance and technical information to Isuzu-Phil for the production of certain vehicles as well as the right to use technical information and use of trademark; that in consideration thereof, Isuzu-Phil shall pay Isuzu-Japan a "Running Royalty" as set forth below (which excludes value-added tax) payable to Isuzu-Japan during the Royalty Period: aEcADH (i) For each Licensed Vehicle sold by Isuzu-Phil , an amount equivalent to five percent (5%) of the Deletion Value of such Licensed Vehicle, and (ii) For each Licensed Component which is not installed on the Licensed Vehicle and is sold by Isuzu-Phil to Customers as repair service parts, an amount equivalent to three percent (3%) of the Net Selling Price of such Licensed Component. It is also represented, that the Agreement was given retroactive effect from June 1, 1996 and shall be effective during the Technical Cooperation Period 1 as defined therein and that, subject to mutual agreement on the extended years of the Royalty Period 2 and renewed royalty amount for Licensed Vehicles and Licensed Components, Isuzu-Phil may extend the mutually agreed years of the Technical Cooperation Period not exceeding ten (10) years from June 1996. However, on December 7, 2011, an amendment was executed between Isuzu-Phil and Isuzu-Japan denominated as "Amendment to the Technical Assistance Agreement" thereby giving it a retroactive effect from July 24, 1995 rendering it effective during the revised Technical Cooperation Period and the Royalty Period, with the following details as contained in the attached Exhibit A of the Amendment to the Technical Assistance Agreement : Expiration Date Expiration Date of Technical Cooperation of Royalty Period Period 1) N(729) December 31, 2019 December 31, 2019 2) N series excluding a) N729 and b) any other N series released after N729, if any December 31, 2006 December 31, 2006 3) TBR December 31, 2008 December 31, 2008 4) F December 31, 2009 December 31, 2009 5) TF (140) December 31, 2006 December 31, 2006 It is finally represented, per Sworn Certification issued by Isuzu-Phil dated September 23, 2010, 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 proceeding, or judicial appeal. DEHcTI In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to royalties derived in the Philippines by a nonresident foreign corporation. It provides: "Section 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, Article 12 of the amended Philippines-Japan tax treaty, which you invoke, may apply to the instant case. It provides: DHcESI "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 percent 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." Based on the aforequoted provisions, the Philippines may tax the royalties paid by a resident hereof to a company which is a resident of Japan at a rate of 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; and 10 per cent of the gross amount of the royalties in all other cases. In view thereof and considering that Isuzu-Phil is not an enterprise registered engaged in preferred areas of activities in the Philippines, and that Isuzu-Japan is a resident company in Japan with no fixed place of business in the Philippines, and that such royalty payment are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, then this office is of the opinion that the royalties paid by Isuzu-Phil to Isuzu-Japan under the subject Agreement , are subject to 10 percent final withholding tax rate pursuant to Article 12 (2) (b) of amended Philippines-Japan tax treaty. Moreover, as provided in Section 108 of the Tax Code of 1997, the said royalties are subject to value-added tax (VAT): ITAaHc "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 3 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right." As to the procedure for the withholding and the payment of VAT, Isuzu-Phil , being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the final VAT on such royalties before making any payment to Isuzu-Japan . In remitting the VAT withheld, Isuzu-Phil 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 the 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 Isuzu-Phil if it is a VAT-registered taxpayer. In case Isuzu-Phil is a non-VAT-registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased and may treat such VAT as an "expense" or as an "asset", whichever is applicable. In addition, Isuzu-Phil is required to issue in quadruplicate a Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for Isuzu-Japan and the fourth copy for Isuzu-Phil 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. aIcETS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue Footnotes 1. "Technical Cooperation Period" means, the period commencing on the Effective date of this Agreement (defined in Section 8) and terminating upon the expiration of seven (7) years thereafter. 2. "Royalty Period" means, for the payment of royalty for any model of the Licensed Vehicle and any Licensed Component therefor, the period commencing on the date of IPC's first sale and delivery of a unit of the Licensed Vehicle to the Customers and terminating upon the expiration of seven (7) years thereafter. 3. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.