ITAD Ruling No. 006-00

January 19, 2000 ITAD RULING NO. 006-00 RP-Japan Art. 10 Art. 12 174-95 026-94 ITAD 25-99 APTi-Philippines, Inc. 5th Floor Citibank-Frabelle Bldg. Madrigal Business Park, Alabang-Zapote Road, Muntinlupa City Attention: Ms . Shiela Marie Carpio-Ma AVP-Finance/Admin Gentlemen : This refers to your letter dated August 9 1999 requesting to use/apply the preferential tax treaty rates to be withheld on dividend and royalty payments of APTi-Phils. Inc. to Advanced Peripherals Technologies Inc. ( APTi ) pursuant to the RP-Japan Tax Treaty. cdlex It is represented that APti is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is neither registered as a corporation nor as a partnership in the Philippines as per Securities and Exchange Commission's certification dated August 5, 1999; that it owns 131,508 shares or ninety-four percent (94%) of the issued and outstanding capital stocks of APTi-Phils. Inc., a domestic corporation duly organized and existing under the laws of the Philippines, and registered with the Board of Investments (BOI) under Certificate of Registration No. EP95-322 dated December 21, 1995; that on June 23, 1999, the Board of Directors of APTi-Phils. Inc. passed and approved a resolution declaring a cash dividend equivalent to ten percent (10%) in favor of all stockholders of record as of March 31, 1999, payable as soon as practicable after completion of the APTi-Phils. Inc. audited financial statements; that such cash dividend shall be set off against the sub-contracting fees or any other payables due from APTi . prcd Furthermore, APTi entered into Technology Transfer Agreement with APTi Phils. Inc. in June 1998 duly registered with the Intellectual Property Office under Certificate of Compliance No. 5-1998-00061 dated August 3, 1998; that APTi will provide technical information with respect to the research and development of printer and other computer peripherals microcodes, device drivers and software support; and that APTi-Phils. Inc. shall APTi a royalty in an amount equivalent to five percent (5%) of its net sales in case the customer is a person or entity other than APTi . In reply, please be informed that Articles 10 and 12 of the RP-Japan Tax Treaty provide among others the following: " Article 10 "1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. prcd "2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: (a) 10 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 percent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; (b) 25 percent of the gross amount of the dividends in all other cases. xxx xxx xxx "3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends 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 dividends, shall not exceed 10 percent of the gross amount of the dividends . (emphasis supplied) prcd xxx xxx xxx " 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 he 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. "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 percent of the gross amount of the royalties . (emphasis supplied) Considering that APTi-Phils. Inc. is a resident company of the Philippines registered with the Board of Investments and engaged in preferred pioneer areas of investments under the investments incentives laws of the Philippines, its dividend and royalty payments to APTi shall both be subject to the preferential tax treaty rate of ten percent (10%) which shall be deducted from the gross amount of the dividends and/or royalties in accordance with the aforementioned provisions of the RP-Japan Tax Treaty. (BIR Ruling 26-94 and 174-95) Moreover, under Section 108 of the National Internal Revenue Code of 1997, the royalty payments to be remitted by APTi-Phils. Inc. is subject to ten percent (10%) value-added tax (VAT). Sec 4.102-1(b) of Revenue Regulations No. 7-95 as amended by Revenue Regulations No. 6-97, provides that: "The VAT on rental and or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration return for this purpose. The duly validated VAT declaration return is sufficient evidence in claiming input credit by the licensee." (ITAD 25-99 dated September 15, 199) This ruling is being issued on the basis of the foregoing facts as presented. However if upon investigation it will be disclosed that the facts are different then this ruling shall be considered null and void. prcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group