ITAD Ruling No. 061-02

April 24, 2002 ITAD RULING NO. 061-02 Article 12, RP-Japan BIR Ruling No. ITAD-177-00 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mr. George J. Lavadia Tax Services Department Gentlemen : This refers to your application for relief from double taxation dated September 11, 2001 on behalf of Sanyo Electronics Components Company, Limited (SECC) of Japan requesting for a preferential tax rate of twenty five percent (25%) to be withheld on royalty payment by Sanyo Capacitor (Philippines) Corporation (SCPC) pursuant to the RP-Japan tax treaty. It is represented that SECC is a non-resident foreign corporation, duly organized and existing under the laws of Japan with principal address at No. 1-1 Sanyo-cho, Daito-shi, Osaka 574-8534, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as per certification dated September 13, 2001 issued by the Securities and Exchange Commission; that SCPC is a corporation duly organized and existing under the laws of the Philippines with principal office at Luisita Industrial Park Special Export Processing Zone, San Miguel, Tarlac City, Tarlac; that on April 1, 2001, SCPC and SECC executed a Technical Assistance Agreement (the Agreement) granting SCPC the license to use the "technical information" of SECC for the manufacture and/or assembly of Solid Electrolyte Capacitors with Polymerized Organic Semiconductor (POSCAP); and that under the said Agreement, SCPC agrees to pay SECC a running royalty calculated at the rate of four percent (4%) of the net selling price of all POSCAPS sold or otherwise disposed of by SCPC during the term of the Agreement. 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. IAcTaC "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 will be taxed at the preferential tax rate of ten per cent (10%) if the payor is a Board of Investments (BOI)-registered enterprise, fifteen per cent (15%) if the payments are in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, and in all other cases, twenty five per cent (25%) of the gross amount of royalties. Such being the case, since SCPC is not a BOI-registered enterprise, and the payments made by SCPC to SECC are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, the herein payments qualify as Loyalty payments under Article 12(2)(b) of the RP-Japan tax treaty subject to the preferential tax rate of twenty five per cent (25%) based on the gross amount of royalties, 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. 74-99: In fine, SCPC shall be responsible for the withholding of income tax at the rate of 25% of the gross amount of royalties. This ruling is issued on the basis of the 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service