ITAD Ruling No. 005-00

January 19, 2000 ITAD RULING NO. 005-00 RP-Japan Art. 12 Art. 11 142-95 Mr. Kunihiko Azuma President & General Manager FCC (Philippines) Corporation 106 North Science Avenue, Laguna Technopark Bian, Laguna S i r : This refers to your letter dated July 30, 1999 requesting a ruling to the effect that the interest and royalty payments to be remitted by FCC (Philippines) Corporation (FCC-Phils . ) to FCC Company Ltd . of Japan (FCC-Japan) shall be subject to preferential tax rate of fifteen per cent (15%) and twenty-five percent (25%) respectively, pursuant to the RP-Japan Tax Treaty. It is represented that FCC-Japan is a non-resident foreign corporation, duly organized and existing under the laws of Japan with principal address at No. 7000-36 Technoland, Hosea-Cho Inasa-Gun, Shizuoka Prefecture, 431-13, Japan; that it is not registered either as a corporation/partnership in the Philippines as per certification dated July 20, 1999 issued by the Securities and Exchange Commission; that FCC-Phils . is a corporation duly organized and existing under the laws of the Philippines; that FCC-Phils . is registered with the Export Processing Zone Authority (EPZA) as an Export Enterprise per Certificate of Registration No. 93-55 dated November 15, 1993; that both entered into a License Agreement dated November 4, 1994; that FCC-Japan granted a non-exclusive and non-transferable right and license to use the Industrial Property Rights and Technical Information in order to manufacture and seek the Products and Parts in the territory in accordance with the provisions of the agreement; that FCC-Phils agreed to pay the three percent (3%) of the difference between the net sales price actually charged by FCC-Phils. to purchasers of its Products and the gross sales price actually charged by FCC-Japan for the Parts sold to FCC-Phils .; that both entered into various Loan Agreement whereby FCC-Japan granted loans to FCC-Phils . amounting to JP340,000,000 dated September 19, 1994, JP110,000,000 dated November 8, 1996 and JP90,000,000 dated August 8, 1995; that the loans have a cumulative amount of JP540,000,000 payable within within five years on semi-annual installments subject to 4 . 7% interest per annum; and that the said loan were acquired to finance the acquisition of various machinery and equipment for company's operation. LexLib In reply, please be informed of the following: 1. For Royalties : Article 12 of the RP-Japan Tax Treaty 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) 25 per cent of the gross amount of the royalties in all other cases. "xxx xxx xxx "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, trademark, 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. Applying the foregoing provision, the preferential tax rate to be withheld by FCC-Phils . on its royalty payments to FCC-Japan shall be twenty-five percent (25%). (BIR Ruling No. UN-417-27-95) LibLex 2. For Interest : Article 11 of the RP-Japan Tax Treaty provides, viz: "Article 11 "1) Interest 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 interest may also be taxed in the Contracting State in which they arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: "a) 10 per cent of the gross amount of the interest if the interest is paid in respect if Government securities, or bonds or debentures; "b) 15 per cent of the gross amount of the interest in all other cases. "xxx xxx xxx "5) The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures." "xxx xxx xxx. Applying the foregoing provision, the preferential tax rate to be withheld by FCC-Phils . on its interest payments to FCC-Japan shall be fifteen percent (15%) pursuant to RP-Japan Tax Treaty. ( ITAD Ruling No . 40- 99, dated November 3, 1999 ) In view of all the foregoing, FCC-Phils . should withhold 25% and 15% on its royalty and interest payments, respectively, to FCC-Japan pursuant to RP-Japan Tax Treaty. 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 null and void. LexLib Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group