ITAD Ruling No. 041-01

April 10, 2001 ITAD RULING NO. 041-01 RP-Japan, Article 12 ITAD No. 7-00 Isuzu Autoparts Manufacturing Corporation 114 North Main Avenue, Phase III Special Economic Zone, Laguna Technopark Bian, Laguna Attention: Masayashu Hideshima Finance and Accounting Manager Gentlemen : This refers to your application for tax treaty relief dated September 15, 2000 requesting for a ruling that royalty payments of Isuzu Autoparts Manufacturing (IAMC) to Isuzu Motors Limited (IML) be subject to a preferential tax rate of twenty five percent (25%) pursuant to the RP-Japan Tax Treaty. It is represented that IML is a corporation duly organized and existing under the laws of Japan with principal office at 26-1 Minami-oi 6-chome, Shinagawa-ku, Tokyo, Japan; that IML is not registered as a corporation/partnership licensed to do business in the Philippines, as per certification dated June 1, 2000 issued by the Securities and Exchange Commission; that IML entered into a Technical Assistance Agreement with IAMC, a PEZA registered corporation with Certificate of Registration No. 97-015 dated February 19, 1997, organized and existing under the laws of the Philippines with principal office located at 114 North Main Avenue Phase III, Special Economic Zone, Laguna Technopark, Bian, Laguna; that in the said agreement, IML granted IAMC technical information and assistance relating to manufacturing and assembly of certain types of transmission; that in consideration of the furnishing of technical information by IML to IAMC under this Agreement, IAMC shall pay IML in Japanese Yen a "Running Royalty" (which excludes value-added-tax) as set forth below: a) For each Licensed Transmission sold by IAMC, an amount equivalent to three percent (3%) of the Net Selling Price of such Licensed Transmission, and b) For each Licensed Component sold by IAMC to customers as repair service parts, an amount equivalent to three percent (3%) of the Net Selling Price of such Licensed Component; that the royalty amount to be remitted shall be converted to Japanese Yen at the rate in effect at the time of remittance; and that the Technical Assistance Agreement & Its Supplemental & Amending Agreement is duly registered with the Intellectual Property Office of the Department of Trade and Industry under Certificate of Compliance No. 5-2000-0075 dated October 13, 2000. In reply, please be informed that Article 12 of the RP-Japan Tax Treaty provides as follows: "Article 12 "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: aCSDIc 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) xxx xxx xxx "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 foregoing, the royalties arising in the Philippines and paid to a resident of Japan shall also be taxable in the Philippines. Thus, the royalty payment of IAMC to IML being the beneficial owner of the royalties in the amount equivalent to three percent (3%) of the Net Selling Price shall be subject to a preferential tax rate of twenty five percent (25%) pursuant to Article 12 (2)(b) of the RP-Japan Tax Treaty. ( BIR Ruling No. ITAD-7-00 dated January 20, 2000 ) This ruling is issued based on the facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group