ITAD Ruling No. 035-03

February 13, 2003 ITAD RULING NO. 035-03 RP-Japan tax treaty, Article 12 BIR Ruling No. DA-ITAD-79-02 Law Firm of V.E. Del Rosario & Partners Rosadel Building, 1011 Metropolitan Avenue Makati City Attention: Atty. Jennifer E. Cerrada Gentlemen : This refers to your letter, dated May 20, 2002, on behalf of your client, Comsys Philippines, Inc. (CPI), requesting confirmation of your opinion that its royalty payments to Nippon Comsys Corporation (NCC) are subject to the preferential tax rate of twenty five per cent (25%) of the gross amount of royalties pursuant to the RP-Japan tax treaty. It is represented that NCC is a corporation duly organized and existing under the laws of Japan, with business address at 17-1 Higashi Gotanda 2-Chome, Shinagawa-ku, Tokyo 141-8647, 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 per certification issued by the Securities and Exchange Commission dated August 5, 2002; that CPI is a corporation organized and existing under the laws of the Philippines with principal office address at 5/F RFM Corporate Center, Pioneer corner Sheridan Sts., Mandaluyong City; that CPI is registered with the Board of Investments under Certificate of Registration No. 94-495 as non-pioneer new service exporter in the field of engineering services; that NCC entered into an ENGINEERING SERVICE AGREEMENT (Agreement) with CPI on February 4, 2002; that under the Agreement, NCC shall provide the following engineering services from outside the Philippines: (a) the design and construction of` telecommunication facilities; (b) alterations to the design and construction of telecommunications facilities; (c) determination as to the suitability of the construction of telecommunications facilities; (d) selection of alternative or competitive methods available for the construction of telecommunications facilities; (e) advice on the alternative types, suitability and capacity of equipment and tools; (f) advice on the alternative types and suitability of materials, instruction manuals, installation methods, inspection methods, trouble shooting methods and total quality control; and (g) advice on the implementation plan for installation, erection and inspection of telecommunication facilities; that the Agreement was registered with the Intellectual Property Office and issued a Certificate of Compliance No. 5-1998-00013, valid for a period of five (5) years from January 1, 1997 to January 1, 2002 and was renewed by the parties for an additional five-year period from January 1, 2002 until December 31, 2006; that in consideration for the services rendered, CPI shall pay NCC a royalty fee in the amount of Forty Million Yen (Y40,000,000.00) for the year 2002 subject to other conditions or stipulations which may be mutually agreed upon by the parties with respect to the duration of the performance of services to be rendered by NCC. In reply, please be informed that Article 12 of the RP-Japan tax treaty, provides as follows: "Article 13 "Royalties "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 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 or films or tapes used 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. DCHaTc xxx xxx xxx Such being the case, and since CPI is not engaged in preferred pioneer areas of investment under Executive Order No. 226 otherwise known as the Omnibus Investment Code, the royalties to be remitted by, CPI to NCC relative to the aforementioned Engineering Service Agreement shall be subject to tax at a rate not exceeding 25% of the gross amount of the royalties pursuant to Article 12(2)(b) of the RP-Japan tax treaty. (BIR Ruling No. DA-ITAD-79-02) Moreover, the said royalty fees are subject to the 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, CPI, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such royalty fees before making any payment to NCC. In remitting the VAT withheld, CPI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by CPI upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case CPI is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition, CPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of NCC, the first three copies thereof to be given to NCC and the fourth copy to be retained by CPI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002] This ruling is issued on the basis of the foregoing 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service