ITAD Ruling No. 030-04

March 30, 2004 ITAD RULING NO. 030-04 Article 12, RP-Japan Tax Treaty; Section 108 & 109 of the Tax Code of 1997 CTA Case No. 6176 BIR Ruling No. 046-95 BIR Ruling No. ITAD 117-03 Nanox Philippines, Inc. 1E-5 Clark Premiere International Park M.A. Roxas Highway Clark Special Economic Zone Clark Field, Pampanga Attention: Mr. Katsuhiro Takahashi Director/VP Administration Gentlemen : This refers to your letter dated January 30, 2004, requesting to amend DA-ITAD Ruling No. 04-04 dated January 30, 2004 specifically the coverage of the VAT exemption on royalty payments made by Nanox Philippines to Nanox Japan pursuant to a prior registration with the Clark Special Economic Zone (CSEZ) as per Certificate of Registration and Tax Exemption (CORTE) No. 99-43 approved and issued on July 26, 1999 by Clark Development Corporation (CDC). It is represented that Nanox Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as per certification dated December 22, 2003 issued by the Securities and Exchange Commission (SEC); that Nanox Philippines is a domestic corporation duly organized and existing under the laws of the Philippines and a Board of Investments (BOI)-registered enterprise as per Certificate of Registration No. EP 99-079 dated July 19, 1999; that Nanox Philippines is a CSEZ-registered enterprise as evidenced by CORTE No. 99-43 dated July 26, 1999, and as such, is entitled to tax and duty free importation of capital goods, equipment, raw materials, and supplies and household and personal items subject only to compliance with BIR regulations and such other laws on export requirements, exemption from all local and national taxes including but not limited to exemption from Corporate Withholding Taxes and Value-Added Taxes (VAT) as provided for in all Certificates issued by the CDC, to wit: CORTE No: 2000-04 dated February 4, 2000, CORTE No. 2000-96 dated October 25, 2000 and CORTE No 2002-004 dated December 3, 2002; that on April 1, 2000, Nanox Philippines, in its desire to engage in the business of manufacturing and selling of liquid crystal display products of Nanox Japan and to acquire the right to use the know-how and other technical information relating thereto, entered into a Technical License and Management Service Agreement with Nanox Japan whereby the latter shall grant Nanox Philippines a non-exclusive and non-assignable license, with no right to grant sublicense, to manufacture and sell the aforementioned products of Nanox Japan within the Philippines by using such know-how, and, management services relative thereto; that said Agreement shall continue in full force for ten (10) years and shall be automatically renewed for another ten (10) year period thereafter; that in consideration for the grant of such license and services, Nanox Philippines shall pay to Nanox Japan a running royalty of two per cent (2%) of the net sales of the Licensed Products during the same royalty period; that the term "net sales" refers to the invoiced amount of the Licensed Products sold by Nanox Philippines; and that said Agreement is covered by Certificate of Compliance No. 5-2001-00029 issued by the Intellectual Property Office (IPO). In reply, please be informed that under Section 108 of the National Internal Revenue Code of 1997, the sale of services shall be subject to value-added tax (VAT). However, Section 109(q) of the Tax Code of 1997 exempts from VAT transactions which are exempt under special laws. Republic Act (R.A.) No. 7227, otherwise known as the "BASES CONVERSION and DEVELOPMENT ACT (BCDA) OF 1992" particularly Section 12(c) thereof provides, as follows: "Section 12. Subic Special Economic Zone . xxx xxx xxx (c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone . In lieu of paying taxes, three percent (3%) of the gross income earned by all business and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities contiguous to the base areas. "(Emphasis supplied) While the foregoing law applied only to Subic Special Economic Zone (SSEZ)-registered enterprises, Executive Order (E.O.) No. 80 dated April 1993, however, has extended the coverage of the said tax incentives to Clark Special Economic Zone (CSEZ)-registered enterprises. By virtue of the said E.O., the Clark Development Corporation (CDC) was established as the implementing arm of the BCDA to manage the CSEZ. [ BIR Ruling No. 046-95 dated March 3, 1995; and C.T.A. Case No. 6176 dated December 16, 2002 ] Section 5 of the said E.O. clearly provides that all the incentives (including tax incentives) enjoyed by the SSEZ-registered enterprises shall also apply to CSEZ-registered enterprises, to wit: "Section 5. Investments Climates in the CSEZ . xxx xxx xxx Among others, the CSEZ shall have all the applicable incentives in the Subic Special Economic and Free Port Zone under RA 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investments Code of 1987, the Foreign Investments Act of 1991 and new investments law which may hereinafter be enacted." (Emphasis supplied) Moreover, Section 43 of the Rules and Regulations Implementing the Provisions Relative to the Subic Special Economic and Free Port Zone and the Subic Bay Metropolitan Authority under R.A. No. 7227, and under Section 6(f) of Revenue Regulations No. 1-95, which applies to CSEZ-registered enterprises by virtue of the said E.O. No. 80, provides that SBF-registered enterprises shall pay a final tax of five percent (5%) of gross income earned in lieu of paying taxes, thus: "Section 43. Tax exemption . SBF Enterprises shall be exempt from all national and local taxes, including but not limited to the following: xxx xxx xxx In lieu of paying taxes, all SBF Enterprises shall pay a final tax of five (5%) percent of gross income earned in accordance to breakdown specified and defined under Section 57 hereunder." In view of all the above and pursuant to the additional representation that Nanox Philippines is a CSEZ-registered enterprise since July 26, 1999, this Office is of the opinion and so holds that the subject royalty payments by Nanox Philippines to Nanox Japan are not subject to VAT. This ruling is deemed incorporated in DA-ITAD Ruling No. 04-04 to the extent that the herein VAT exemption applies to the royalty payments of Nanox Philippines under the subject Technical License and Management Service Agreement. This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. TAacIE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service