ITAD Ruling No. 058-02

April 24, 2002 ITAD RULING NO. 058-02 Joaquin, Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. George J. Lavadia Tax Service Department Gentlemen : This refers to your application for tax treaty relief dated September 11, 2001 requesting confirmation of your opinion that the royalty payments of Sanyo Capacitor (Philippines) Corporation (SCPC) to Saga Sanyo Industries Co., Ltd. (SSIC) are subject to twenty five per cent (25%) withholding tax pursuant to Article 12(2)(b) of the RP-Japan tax treaty. It is represented that SSIC is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office address at 217 Fukumo, Oaza, Omachi, Kishima-gun, Saga, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated September 13, 2001 issued by the Securities and Exchange Commission (SEC); that SCPC is a domestic corporation duly organized and existing under the laws of the Philippines with office address at Luisita Industrial Park Special Export Processing Zone, San Miguel, Tarlac City; that SCPC is authorized to manufacture, produce, assemble, purchase, sell on a wholesale basis, lease except financial leasing, and/or export capacitors as well as individual parts thereof; that on April 1, 2001, a Technical Assistance Agreement (the Agreement) was entered into by and between SCPC and SSIC whereby the latter shall grant SCPC a non-exclusive right and license, without the right to sublicense others, subject to the restrictions contained in the Agreement: (1) to use the Technical Information of SSIC with respect to the manufacture/assembly of the Aluminum Solid Capacitor with Organic Semiconductive Electrolyte (OS-CON) in the Philippines and (2) to make use of the patents applicable to the Products, if any, owned by SSIC in the Philippines now and during the term of the Agreement; that the Agreement shall come into force on the Effective Date as the term is defined in the Agreement and shall remain in force for a period of two (2) years and shall be automatically extended from year to year for one (1) year period; that in consideration for the right granted under the Agreement, SSIC shall receive a running royalty calculated at the rate of four per cent (4%) of the net selling price of all OS-CANS sold or otherwise disposed of by SCPC during the term of this Agreement; and that the Agreement is covered by Certificate of Compliance No. 5-2001-00071 issued by the Intellectual Property Office (IPO) on March 28, 2001: 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 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 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 royalty payments of SCPC to SSIC are subject to a preferential tax rate of twenty-five per cent (25%) of the gross amount of royalties pursuant to Article 12 (2)(b) of the RP-Japan tax treaty. (DA-ITAD-41-01 dated April 10, 2001) Finally, as PEZA registered enterprise SCPC is subject to "5% special tax regime, in lieu of all taxes", hence, SCPC is exempt from VAT pursuant to Revenue Memorandum Circular No. 75-99. 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 considered null and void. EHTADa Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service