ITAD Ruling No. 039-99

November 3, 1999 ITAD RULING NO. 039-99 RP-Japan, Arts. 12 & 15 Sec. 108 134-96 044-97 069-96 Castillo Laman Tan Pantaleon and San Jose Law Offices The Valero Tower # 122 Valero St., Salcedo Village 1277 Makati City Attention: Atty . Virginia B . Viray and Atty . Dina D . Lucenario Gentlemen : This is in connection with your application for relief from double taxation dated May 29, 1998, on behalf of your client, Rohm Mechatech Co. Ltd. (RMC), requesting for a preferential tax rate of ten percent (10%) to be withheld on the royalty remittances by Rohm Mechatech Philippines, Inc. (RMP), pursuant to the RP-Japan Tax Treaty. LexLib It is represented that RMC is a corporation organized and existing under the laws of Japan with no permanent establishment in the Philippines, as per certification dated June 9, 1998 issued by the Securities and Exchange Commission; that RMP, a BOI-registered pioneer corporation organized and existing under the laws of the Philippines under Certificate of Registration No. EP93-432, entered into a Consulting Agreement with RMC, whereby RMC shall render the following consulting services upon request of RMP: (1) consulting services for the technical management or administration of any scientific, industrial or commercial undertaking; (2) consulting services for the management and / or administration of business; (3) consulting services for the management of personnel; (4) consulting services for the management of funds; (5) consulting services relating to safety and health; and other consulting services which are necessary or incidental to any of the foregoing items; that RMC shall send members of its staff to the Philippines, upon RMP's request, for the purpose of providing the said consulting services; that in consideration of said services, RMP shall pay RMC an initial fee in the amount 23,082,424.83, and thereafter an amount equivalent to three percent (3%) of the gross sales of RMP as running consulting fee, which is subject to review; and that the said Consulting Agreement is duly registered with the Intellectual Property Office of the Department of Trade and Industry under Certificate of Compliance No. 5-1998-00037 dated June 5, 1998. In reply, please be informed that Article 12 of the RP-Japan Tax Treaty provides, viz : "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 cinematographic 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, the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience . (Emphasis supplied) xxx xxx xxx" Applying the foregoing provisions, and inasmuch as the Consulting Agreement between RMC and RMP has been approved by the Intellectual Property Office of the Department of Trade and Industry, and that RMP is a BOI-registered pioneer corporation, this Office hereby confirms that the consulting fees arising in the Philippines and payable to RMC by RMP are subject to the preferential royalty tax rate of 10%.(BIR Ruling No. 134-96) Moreover, Article 15 of the same Treaty provides that: "ARTICLE 15 "1. Subject to the provisions of Article 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State. cdlex "2. Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of a Contracting State in respect of an employment exercised in that other Contracting State shall be taxable only in the first-mentioned Contracting State if: (a) the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State, and (c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other Contracting State. xxx xxx xxx" Thus, the salaries, wages or similar remuneration which will be derived by the staff of RMC in the Philippines in the performance of the services under the said Agreement may not be subject to Philippine income tax provided the conditions set forth in the foregoing Article are present or complied with. Otherwise, the said income shall be subject to the rate of tax provided for under Section 25 (A) of Tax Code of 1997 on nonresident alien engaged in trade or business within the Philippines. (BIR Ruling Nos. 044-97 & 069-96) Furthermore, under Section 108 of the said Code, the royalty payments to be remitted by RMP is subject to the 10% value-added tax. 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 for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." LexLib In view of all the foregoing, RMP shall be responsible for the withholding of income tax at the rate of 10% and the value-added tax at the rate of 10%, both based on its royalty remittances to RMC, pursuant to the said Agreement. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group