ITAD Ruling No. 083-00

August 1, 2000 ITAD RULING NO. 083-00 RP-Japan Art. 12 49-96 Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty . George J . Lavadia Principal, Tax and Corporate Services Gentlemen : This refers to your letter dated November 16, 1999 requesting on behalf of your client, KASEI INDUSTRY CO., LTD. (KASEI), confirmation of your opinion that its royalty income derived from the Philippine is entitled to the preferential tax rate of twenty-five percent (25%), pursuant to the RP-Japan Tax Treaty. It is represented that KASEI is a non-resident foreign corporation duly organized and existing under the laws of Japan, that it is not registered as a corporation/partnership in the Philippines as per certification dated October 18, 1999 issued by the Securities and Exchange Commission; that on January 22, 1999, it entered into a License and Technical Assistance Agreement with K & K MOLDING, INC. (K&K), a Philippine Economic Zone Authority (PEZA) registered domestic enterprise engaged in the manufacture and assembly of plastic injection molding parts; that the said Agreement complies with the provisions of Section 87 and 88 of the Intellectual Property Code as certified by the Intellectual Property Office under Certificate of Compliance No, 5-1999-00081; that under the said Agreement, KASEI will provide K&K with technical information and know-how relative to the operation and maintenance of the latter's equipment as well as the manufacture of its products; that KASEI's engineers/foremen will be sent, if necessary, but shall not stay in the Philippines for more than six (6) months; and that in consideration for such services, KASEI shall be entitled to receive royalty payments at the rate of three percent (3) of K&K's net sales. llcd In reply, please be informed that Article 12 of the RP-Japan Tax Treaty provides as follows: "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 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. (emphasis supplied) xxx xxx xxx "(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, 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. (emphasis supplied) xxx xxx xxx" In view thereof, the herein payments which are made in consideration for the services involving transfer of information concerning industrial, commercial or scientific experience, qualifies as royalty payments under Article 12(2)[b] of the RP-Japan Tax Treaty. Hence, your opinion that the royalty income derived by KASEI INDUSTRY CO., LTD. is entitled to the preferential tax rate of twenty five per cent (25%) based on the gross amount of royalties, is hereby confirmed. This ruling is being 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. prcd Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group