ITAD Ruling No. 075-02

May 2, 2002 ITAD RULING NO. 075-02 Article 12, RP-Korea Tax Treaty BIR Ruling No. ITAD-108-00 Samsung Electro-Mechanics Phils. Corp. Blk. 5 Calamba Premiere International Park Brgy. Batino, Prinza, Calamba, Laguna Attention: Mr. Dae Sik Choi General Manager Gentlemen : This refers to your application for tax treaty relief dated March 2, 2001, requesting confirmation of your opinion that royalty payments made by your company to Samsung Electro-Mechanics Co., Ltd. are subject to the 15% preferential tax rate as set forth under Article 12 of the RP-Korea Tax Treaty. It is represented that Samsung Electro-Mechanics Co., Ltd. (SEMCO) is a non-resident foreign corporation duly organized and existing under the laws of Korea with business address at 314 Maetan 3-dong, Paldal-gu, Suwon, Kyunggi-do 442-743, Republic of Korea; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification dated February 28, 2001 issued by the Securities and Exchange Commission (SEC); that Samsung Electro-Mechanics Phils. Corp. (SEMPHIL) is a domestic corporation duly organized and existing under Philippines laws and duly registered as an enterprise at Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 97-074; that SEMPHIL entered into a Technical Assistance and License Agreement with SEMCO effective for seven (7) years commencing from October 1, 2000; that under the said Agreement, SEMCO shall grant to SEMPHIL the license to use the technical information and trademarks in the manufacturing of chip resistors, tantalum capacitors, multilayer ceramic capacitors and surface acoustic wave filters; and that in consideration for such grant, SEMPHIL shall pay royalties to SEMCO in the amount equivalent to 5% of sales value, net of withholding taxes of all Licensed Products manufactured in the Philippines during the term of this Agreement. In reply, please be informed that Article 12 of the RP-Korea Tax Treaty states that: "Article 12 ROYALTIES "(1) Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State if such resident is the beneficial owner of the royalties." "(2) However, such royalties may be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 percent of the gross amount of the royalties," "(3) Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, 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, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television or tapes for the use of radio broadcasting." "xxx xxx xxx" The foregoing RP-Korea Tax Treaty provision allows a 10% preferential tax rate on royalty payments if the paying company is registered with the Board of Investments and engaged in preferred areas of investment and 15% in all other cases as long as the recipient of the royalty payments is the beneficial owner of the royalties and a resident of the Contracting State. Inasmuch as SEMCO is the beneficial owner and a resident of Korea in accordance with the above-quoted Article 12(2), your opinion that the royalty payments to be made by Samsung Electro-Mechanics Phils. Corp. (SEMPHIL) to Samsung Electro-Mechanics Co. Ltd. (SEMCO), shall be subject to Philippine final withholding tax rate of 15% of the gross amount of the royalties pursuant to the RP-Korea Tax Treaty is hereby confirmed. (BIR Ruling No. ITAD-108-00 dated August 9, 2000) Finally, as PEZA registered enterprise, SEMPHIL is subject to "5% special tax regime, in lieu of all taxes", hence, SEMPHIL is exempt from VAT pursuant to Revenue Memorandum Circular No. 74-99. This ruling is 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service