ITAD Ruling No. 007-00

January 20, 2000 ITAD RULING NO. 007-00 RP-Japan Article 12 234-94 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City Attention: Mr . Alexander B . Cabrera M a d a m : This refers to your letter dated June 14, 1999 on behalf of your client , NEC Computer Storage Phils . Inc . (NEC-CSP ), requesting confirmation of your opinion that the royalty payments to NEC Corporation (NEC) which is a resident of Japan is subject to the preferential tax rate of 25% pursuant to Article 12 of the RP-Japan tax treaty. prcd It is represented that NEC is a non-resident foreign corporation duly organized and existing under the laws of Japan, with principal office at 7-1 Sheba 5-chome, Minato-Ku, Tokyo 108-8001 Japan; that NEC has no permanent establishment in the Philippines as evidenced by its Certificate of Non-Registration from the Securities and Exchange Commission (SEC) dated August 5, 1999; that NEC entered into a Sub-Licensing Agreement" with NEC-CSP , a corporation duly registered with the SEC and Philippine Economic Zone Authority (PEZA) with office address at 100 Phase 4-Special Economic Zone Laguna Technopark, Bian, Laguna, Philippines; that in the said agreement, NEC granted NEC-CSP the license to use in the Philippines IBMs technical information related to IBM hard disk drives such as Capricorn, Titan and Janus; that in consideration, NEC-CSP agrees to pay NEC the technology royalty of two percent (2%) in 1998 and three (3%) in 1999 and the years following, on all Capricorn, Titan, Janus and other IBM hard disk drives sold by NEC-CSP ; that in addition, a lump-sum royalty for each type of product; to wit: for Capricorn US$21,250,000.00, payable in fifty one (51) months from September 1, 1998 to November 30, 2002 at US$416,666.67 per month; for Titan US$20,000,000.00, payable in 60 months from September 1, 1998 to August 31, 2003 at US$333,333.33 per month; and for Janus US$20,000,000.00, payable in two installments, US$13 million by the end of August 1999 and US$7 million within sixty days after the receipt of NEC's invoice; and that the sub-licensing agreement is duly registered with the Intellectual Property Office of the Department of Trade and Industry under Certificate of Compliance No. 5-1999-000-38 dated November 5, 1998. cdll In reply, please be informed that pertinent portions of Article 12 of the RP-Japan Tax Treaty read 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 the gross amount of the royalties in all other cases. "xxx xxx xxx "3) The term royalties as used in this Article means payment 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 Accordingly, the royalty remittances by NEC-CSP to NEC including the two percent (2%) royalty fee in 1998 and three percent (3%) in 1999 and the years following, the lump-sum royalty payments totaling US$61,250,000.00 payable in installment from September 1, 1998 to August 31, 2003 and all other royalty payments to be agreed upon between the two parties on other products to be manufactured under this sub-licensing agreement shall be subject to the preferential tax rate of 25% Philippine income/withholding tax in accordance with the aforequoted provision of the 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 considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group