ITAD Ruling No. 019-99

August 18, 1999 ITAD RULING NO. 019-99 RP-Japan Article 12 000-00 Juntec Corporation Blk. 5, Lot 7, PEZA-LIIP, Bo. Mamplasan, Bian, Laguna Attention: Takeko Hamahata Vice-President Gentlemen : This refers to your application for relief from double taxation dated March 22, 1999 on behalf of HONKO SEIKOSHO CO., LTD., (HONKO) requesting for a preferential tax rate of ten percent (10%) to be withheld on royalty remittances by JUNTEC CORPORATION (JTC), pursuant to the RP-Japan Tax Treaty. llcd It is represented that HONKO is a non-resident foreign corporation duly organized and existing under the laws of Japan, with no permanent establishment in the Philippines; that it entered into a Technical Assistance Agreement for a period of ten (10) years from January 1, 1998 up to December 31, 2007 with JTC, a PEZA-registered domestic corporation, duly organized and existing under the laws of the Philippines, engaged in the manufacture and assembly of metal parts and components for floppy disk drives and car audio systems; that HONKO will provide JTC technical information for the manufacture and assembly of metal parts and components for floppy disk drives, audio equipment and related information system equipment; that said agreement was duly registered with the Intellectual Property Office; that in consideration for the technical information, the JTC shall pay to HONKO, a royalty equivalent to five percent (5%) of the net sales amount of products. In reply, please be informed that Article 12 of the RP-Japan Tax Treaty provides 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. "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, 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" Such being the case, and since JTC is not registered with the Board of Investments and is not engaged in preferred pioneer areas of investment under Executive Order No. 226 otherwise known as the Omnibus Investments Code, the royalties to be remitted by JTC to Honko relative to the aforementioned Technical Assistance Agreement shall be subject to a tax rate of 25% of the gross amount of the royalties pursuant to Article 12(2)(b) of the RP-Japan Tax Treaty. Accordingly, JUNTEC CORPORATION, as withholding agent is required to pay the under-remitted amount of P895,382.54 plus surcharge, interest and penalties through the bank within the jurisdiction of the Revenue District Office (RDO) where the former is registered. cdlex 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. (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue