ITAD Ruling No. 078-03

June 11, 2003 ITAD RULING NO. 078-03 RP-Japan Tax Treaty Art. 12 DA-ITAD-056-03 Crestec Philippines, Inc. Unit 106 & 107 Charlie Bldg. 789 Subic International Hotel Complex Sta. Rita SBFZ 2200, Zambales Attention: Mr. Kyoichi Mino Managing Director Gentlemen : This refers to your application for relief from double taxation dated March 13, 2003, pursuant to the RP-Japan tax treaty, regarding the royalties paid by Crestec Trading Philippines, Inc. (Crestec Phils) to Crestec Incorporation (Crestec Japan). It is represented that Crestec Japan is a corporation duly organized and existing under the laws of Japan with business address at 676 Kasai Shinden-cho, Hamamatsu City, Shizuoka, Prefecture, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated April 29, 2003; that Crestec Phils is a corporation duly organized and existing under the laws of the Philippines with business address at Units 106 & 107 Charlie Building, 789 Subic International Hotel Complex, Santa Rita SBFZ 2200, Zambales; that on July 1, 2000, Crestec Japan and Crestec Phils entered into a Trademark, Logo and Trade Name License Agreement wherein Crestec Japan permits Crestec Phils to use the name "Crestec" as part of its company name and to use any logo, name and trademark registered by Crestec Japan, which would be beneficial to Crestec Phils' business activity in the Philippines; and that in consideration for the license provided, Crestec Phils shall pay the licensor royalty fees equal to two (2) percent of the total sales price of all the products manufactured and sold or services provided by Crestec Phils under this 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. "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 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. "xxx xxx xxx" Based on the abovequoted provisions, 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 percent (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 the royalties. HScCEa Such being the case, since Crestec Phils is not a BOI-registered enterprise, and that the payments made to Crestec Japan are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the herein royalty payments are subject to the 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. (BIR Ruling No. DA-ITAD-056-03 dated April 15, 2003) 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 without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service