ITAD Ruling No. 023-03

January 30, 2003 ITAD RULING NO. 023-03 RP-Japan Tax Treaty, Article 11 & 12 BIR Ruling No. DA-ITAD 97-02 BIR Ruling No. DA-ITAD 111-02 ENKEI Philippines, Inc. Lot 17 Carmelray Industrial Park Canlubang, Calamba, Laguna Attention: Mr. Hiroyuki Nagura Managing Director Gentlemen : This refers to your application for tax treaty relief dated November 14, 2002 requesting for the availment of preferential tax rate of 10% on the interest payments of Enkei Philippines, Inc. (EPI) to Enkei Corporation (EC) and 10% on the royalty payments of EPI to EC and to Enbishi Aluminum Wheels Ltd. (EB) pursuant to Articles 11 and 12, respectively, of the RP-Japan tax treaty. It is represented that EC is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at Act Tower 26 F1 111-2, Itayamachi Hamamatsu, Shizuoka Prefecture, Japan; that EC is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated October 8, 2002; that EPI is a corporation organized and existing under Philippine laws with office address at 104 Industry Drive, Carmelray Industrial Park, Canlubang, Laguna and duly registered as a pioneer enterprise with the Board of Investments with Certificate of Registration No. EP 95-119 dated July 14, 1995; that on December 18, 2001, EPI issued a Promissory Note to EC for the amount of Yen: One Hundred Forty Million Only (140,000,000.00) due on May 31, 2005 with all interest rate of 2% per annum and shall be due and payable every quarter starting March 31, 2002; that on March 1, 2002, Royalty Agreements were entered into by and between 1) EPI. and EC and 2) EPI and EB, a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at 439-5 Kami-Okada, Iwata City, Shizuoka Prefecture, Japan, whereby EPI desires to receive newest technical know-how, guidance and transfer from technical skills of production operation level concerning the all product that produced by EPI (automotive aluminum wheel production); and that in consideration, EPI shall pay the royalty fees calculated as one point five (1.5)% for EC and one (1)% for EB of the annual sales amount of all concerned products that produced by EPI (automotive aluminum wheel). In reply, please be informed that Article 11 of the RP-Japan tax treaty provides as follows, 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 it 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 of the interest is paid in respect of Government securities, or bonds or debentures; "(b) 15 per cent of the gross amount of the interest in all other cases. "(3) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the interest 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 interest, shall not exceed 10 per cent of the gross amount of the interest. "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 profit, 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" Based on the aforequoted provisions, interest payments will be taxed at a preferential rate of not exceeding ten per cent (10%) if the interest is paid in respect of government securities, or bonds or debentures, or if the company paying the interest, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; and in all other cases, fifteen per cent; (15%) of the gross amount of the interest. Such being the case and since the EPI is a pioneer enterprise engaged in preferred pioneer areas of investment under the incentive laws of the Philippines, this Office is of the opinion and so hold that the interest payments to be made by EPI to EC are subject to Philippine final withholding tax rate of 10 per cent of the gross amount of interest pursuant to Article 11(3) of the RP-Japan tax treaty is hereby confirmed. ( BIR Ruling No. 97-02 dated May 16, 2002 ) Moreover, the Loan Agreement entered into by and between EPI and EC is subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. TCaADS As regards the royalty payments please be informed that Article 12 of the RP-Japan tax treaty states that: " 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, 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" Based on the aforequoted provisions, royalties paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting are subject to fifteen (15%) per cent of the gross amount of the royalties, ten (10%) per cent if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred pioneer areas of investment and twenty five (25%) per cent of the gross amount of the royalties in all other cases. Such being the case and since EPI is registered with the Board of Investments, royalties arising in the Philippines and paid to EC and EB shall be subject to a tax at 10% percent of the gross amount of royalties. ( BIR Ruling DA-ITAD-111-02 dated May 31, 2002 ) Moreover, the said royalty payments shall be subject to the 10% value-added tax (VAT) under Sec. 108 (A)(1) and (3) of the Tax Code of 1997. Section 4.102-1(b) of Revenue Regulations No. 7-95 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 ( BIR Form No. 1600 Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld ) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. cEAIHa Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service