ITAD Ruling No. 067-00

2000 ITAD RULING NO. 067-00 RP-Japan, Article 12 007-86 003-96 Mr. Yoichi Muramoto President, MAPLE Muramoto Audio-Visual Philippines, Inc. Mactan Export Processing Zone Lapu-Lapu City, Cebu, Philippines S i r : This refers to your application for relief from double taxation dated November 29, 1999, on behalf of Muramoto Industry Co. Ltd of Japan (MIC), requesting for a preferential tax rate of twenty five percent (25%) to be withheld on your royalty remittances, pursuant to the RP-Japan Tax Treaty. It is represented that MIC is a corporation organized and existing under the laws of Japan with no permanent establishment in the Philippines, as per certification dated December 14, 1999 issued by the Securities and Exchange Commission; that Muramoto Audio-Visual Philippines, Inc. (MAPLE) is a corporation organized and existing under the laws of the Philippines and a PEZA-registered Ecozone Export Enterprise with Registration Certificate No. 90-08, located at Mactan Economic Zone; that MAPLE entered into a Service Agreement for Technical Advice and Business Support with MIC, whereby MIC shall render the following services, among others: (1) exclusively provide full assistance and furnish MAPLE with all recent Technical Advice, Design Cooperation and Business Support for the production and marketing electronic products, (2) exclusively provide and accept MAPLE to access to MIC's worldwide intelligence system for least-cost sourcing of raw materials and packaging supplies, testing procedures and standards including laboratory analysis services, (3) conduct training of production, quality control and administrative employees, (4) conduct seminars and conference for training of MAPLE's employees and customers, (5) provide materials including films for training in the fields of production, quality control and marketing, (6) provide professionals who are experts in all disciplines necessary for successful advising to MAPLE regarding the Technical Advice, Design Cooperation and Business Support; that in consideration of said services, MAPLE shall pay MIC fees to be agreed upon by the parties, to be calculated on the basis of the total sales of each fiscal year but not to exceed two percent (2%) of the said sales; and that the said Service Agreement is duly registered with the Bureau of Patents, Trademarks and Technology Transfer (now the Intellectual Property Office) of the Department of Trade and Industry under Certificate of Registration No. 1773 dated January 12, 1996. Under the said Agreement, Technical Advice means the provision of MIC's technical information to MAPLE with regard to the production of electronic products and related equipment whether orally or in writing; Design Cooperation, the provision of cooperation in making necessary design drafts with regard to the manufacturing of electronic products and related equipment in the Philippines from time to time during the period of the Agreement; and Business Support, all activities with regard to the marketing and sale of the electronic products as well as the support for contract award activities and information. In reply, please be informed that Article 12 of the RP-Japan Tax Treaty provides, viz: "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. . . . "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 cinematographic 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, the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (Emphasis supplied) xxx xxx xxx" The tax treaty defines "royalties" to include "payments of any kind received as a consideration for information concerning industrial, commercial or scientific experience." According to the Commentaries of the ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11, Commentary on Article 12 (Royalties), 1998, p. 151), such information alludes to the concept of "know-how". The definition of know-how, which has been adopted by the said Committee, is "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique." In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Thus, payments obtained as consideration for after-sales service, for services rendered by a seller to the purchaser under a guarantee, for pure technical assistance, or for an opinion given by an engineer, an advocate or an accountant, do not constitute royalties within the meaning of paragraph 4. As thus defined by the Service Agreement by and between MAPLE and MIC, the information to be imparted by MIC falls under the purview of know-how. Such being the case and inasmuch as the said Agreement has been approved by the Bureau of Patents, Trademarks and Technology Transfer (now the Intellectual Property Office) of the Department of Trade and Industry, this Office hereby confirms that the fees arising in the Philippines and payable to MIC by MAPLE, under such Agreement, are subject to the preferential royalty tax rate of 25%.(BIR Ruling Nos. 003-96 & 007-86) This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said 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