ITAD Ruling No. 050-99

December 22, 1999 ITAD RULING NO. 050-99 RP-Japan Article 12 038-97 077-96 Sycip Gorres Velayo & Co. 3rd Floor, Insular Life Bldg. Cor. Gorordo and Gen. Maxilom Avenue Cebu City Gentlemen : This refers to your letter dated March 8, 1999, requesting for confirmation on behalf of NKC Manufacturing Philippine Corporation (NPC) that its remittance of royalty payments to Nakanishi Metal Works Co. Ltd. of Japan (NKC-J), is subject to the 25% income/withholding tax pursuant to the RP-Japan Tax Treaty. It is represented that NPC is a domestic corporation organized and existing under the laws of the Republic of the Philippines with principal office at Mactan Economic Zone II, Lapu-lapu City, Cebu, Philippines; that it is registered with the Philippine Economic Zone Authority (PEZA) under PEZA Board Resolution No. 97-062 dated March 17, 1997; that it is a wholly-owned subsidiary of NKC-j, a non-resident foreign corporation not engaged in business in the Philippines as shown by SEC Certification dated April 20, 1998 and that it is organized and existing under the laws of Japan having its principal office at 3-5, Tenmabashi 3-chome, Kitaku, Osaka, Japan; that on June 1, 1998, NKC-J and NPC entered into a Royalty License Agreement duly registered with Intellectual Property Office of the Department of Trade and Industry on April 8, 1997, whereby NKC-j grants to NPC the exclusive right to use the Technical Information and Registered Trademark in the manufacture and sales of the licensed products such as bearing retainer, rubber seal, core plate, sash roller, and other products relating to the mentioned products; and that, in consideration for the foregoing premises NPC will pay to the NKC-J the running royalty of 3% of sales prices of the Products sold in the Territory to third party other than NKC-J. LibLex In reply, please be informed that Article 12 of the RP-Japan Tax Treaty, provides as follows: "Article 12 "1. Royalties arising in a Contracting States 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 where are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; cdll (b) 25 per cent of the gross amount of the royalties in all other cases. "3. . . . "4. The term " royalties " as used in this Article means payment 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. Accordingly, your opinion that the royalty payments to be made by NPC to NKC-J is subject to the preferential tax rate of 25% under the Article 12(2)(b) of the RP-Japan tax treaty to be withheld before actual remittance to the latter, is hereby confirmed. This ruling is being issued on the basis of the foregoing 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group