ITAD Ruling No. 079-02

May 2, 2002 ITAD RULING NO. 079-02 Articles 12, RP-Japan Tax Treaty BIR Ruling No. 019-99 Pilipinas Kao, Inc. 108-A E. Rodriguez Jr. Avenue Bagumbayan, 1110 Quezon City Attention: Erotido L. Valdez Vice President-Finance Administration Gentlemen : This refers to your application for relief from double taxation dated February 28, 2000, on behalf of Kao Corporation of Japan (KAO), for confirmation that your royalty remittance to KAO is subject to 25%, pursuant to the RP-Japan Tax Treaty. It is represented that KAO, having its principal place of business at 14-10, Nihonbashi Kayabacho 1-chome, Chuo-ku, Tokyo 103-8210, Japan, is a corporation organized and existing under the laws of Japan; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated March 21, 2000; that PILIPINAS KAO, Inc. (PILIPINAS KAO) having its principal place of business at 108A E. Rodriguez, Jr. Avenue, Bagumbayan 1110, Quezon City, is a corporation organized and existing under the laws of the Philippines and a BOI-registered Export Producer; that KAO owns certain patents and trademarks and technological, marketing and other know-how relating to or useful for the manufacture and sale of the chemical products of KAO; that KAO and PILIPINAS KAO entered into a Renewal Technological Assistance Agreement dated, and effective on, January 17, 1997, pursuant to which KAO granted certain intellectual property rights to PILIPINAS KAO to use such intellectual property; that KAO and PILIPINAS KAO replaced such Agreement with a new one entitled License, Technology and Other Assistance Agreement dated January 1, 1999 to permit further PILIPINAS KAO to manufacture and sell said products utilizing such patents, trademarks and know-how under the terms and conditions set forth therein; that in consideration of the license and rights granted to PILIPINAS KAO, the latter shall pay KAO a royalty of one point five percent (1.5%) of its Net Sales; and that the said Agreement has been certified by the Intellectual Property Office of the Department of Trade and Industry to the effect that it has complied with the Intellectual Property Code under Certificate of Compliance No. 5-1998-00054 dated March 12, 1999. 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. 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. "xxx xxx xxx." Such being the case, and since PILIPINAS KAO is not engaged in preferred pioneer areas of investment under Executive Order No. 226 otherwise known as the Omnibus Investments Code, the royalties to be remitted by PILIPINAS KAO to KAO relative to the aforementioned Technological Assistance Agreement shall be subject to a tax rate of not exceeding 25% of the gross amount of the royalties pursuant to Article 12(2)(b) of the RP-Japan Tax Treaty. ( BIR Ruling No. ITAD 019-99 ) Furthermore, under Section 108 of the Tax Code of 1997, such royalty payments are subject to the 10% value-added tax (VAT). Accordingly, PILIPINAS KAO shall, before making payment of royalties to KAO, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for and on behalf of KAO. The duly validated VAT declaration/return is sufficient evidence for PILIPINAS KAO in claiming input tax credit. [Section 4.102.1 (b) of Revenue Regulations No. 7-95] In view of all the foregoing, PILIPINAS KAO shall be responsible for the withholding of income tax at the rate of 25% of the gross amount of royalties and the value-added tax at the rate of 10% of the contract amount. 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service