ITAD Ruling No. 046-00

February 15, 2000 ITAD RULING NO. 046-00 RP-Japan, Art. 12 DA-031-1-20-97 DA-263-7-19-96 Tosoh Polyvin Corporation LIMA Technology Center, SEZ Lipa City, Batangas Attention: Ms . Ruby P . Dones Finance and Accounting Head Gentlemen : This refers to your application for tax treaty relief in behalf of Tosoh Polyvin Corporation (TPC) requesting for a ruling on the correct tax rate on royalties pursuant to RP-Japan Tax Treaty. It is represented that Plas-Tech Corporation (PTC-Japan) is a non-resident foreign corporation organized and existing under the laws of Japan with business address at 5-11-13, Koto-ku, Tokyo 135-0042, Japan; that TPC is a domestic corporation organized and existing under Philippine laws and duly registered as an Ecozone Export Enterprise at Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 98-047 and engaged in the manufacture of polyvinyl chloride compounds; that on April 26, 1999, TPC entered into a Licensing Agreement with PTC-Japan effective retroactively on September 9, 1998; that the said Agreement allows TPC to establish a vinylchloridate compound manufacturing factory using the technological know-how provided by PTC-Japan; that TPC is also allowed to sell its manufactured goods in other countries other than Japan; that under the Agreement TPC will pay PTC-Japan the following fees: 1. License fee for basic engineering package. This package describes the necessary technical information to design and construct the factory; 2. License fee for operation manual. This manual provides all necessary technical information needed to operate, maintain and ensure the quality control standards of the factory; 3. Compensation for technical and additional technical assistance. This includes per diem, travel and transportation fee and other actual expenses; 4. Running royalty (quarterly and yearly) based on earnings of TPC through its sale of the manufactured compounds. In reply, please be informed that Article 12 of the RP-Japan Tax Treaty provides 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. prcd (3) . . . (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 tapes for radio or television broadcasting, any patent, trademark, 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." Accordingly, the above-mentioned license fees for basic engineering package and for operation manual paid by TPC to PTC-Japan pursuant to their Licensing Agreement fall within the definition of "royalties" under the above-quoted provision of RP-Japan Tax Treaty. Likewise, the compensation for technical and additional technical assistance paid by TPC to PTC-Japan is considered embraced within the meaning of the term "royalties" since the fee is being paid for the dispatch of the technical personnel without which the transfer of know-how would not be possible.(BIR Rulings No. DA-031-1-20-97 and DA-263-7-19-96) Such being the case, the license fee for basic engineering package, license fee for operation manual, the compensation for technical and additional technical assistance, the quarterly royalty of 2% of the difference between TPC's net sales and costs of raw materials and the yearly royalty of 4.75% of TPC's earnings before interest and income taxes paid by TPC to PTC-Japan pursuant to their Licensing Agreement are subject to 25% royalty rate under the RP-Japan Tax Treaty. This ruling is being issued based on the foregoing representations. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group