ITAD Ruling No. 087-00

August 1, 2000 ITAD RULING NO. 087-00 RP-JAPAN Art. 12 ITAD 19-99 JS Steel Cebu Corporation Mactan Economic Zone Lapu-lapu City, Cebu Attention: Mr . Masao Sekiuchi President Gentlemen : This refers to your letter dated June 24, 1998, requesting for approval of the use of preferential tax rate on your royalty payments to DAIWA KOHTAI CO., LTD. (DAIWA), pursuant to the RP-Japan Tax Treaty. LexLib It is represented that DAIWA 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 January 26, 1999 issued by the Securities and Exchange Commission (SEC); that JS STEEL CEBU CORPORATION (JSC), on the other hand is a Philippine Economic Zone Authority (PEZA)-registered domestic corporation duly organized and existing under the laws of the Philippines; that on January 08 1997 a Technology Transfer Agreement was entered into by and between DAIWA and JSC whereby DAIWA shall provide JSC the following assistance: a) conduct training on basic operations and troubleshooting of problems concerning the slitter line; b) formulate more efficient procedures in operating the factory warehouse including monitor and control of consumption for cost control purposes; c) establish an efficient product delivery system to customers including the tools/jigs equipment, delivery vehicles and scheduling system that is required; d) generate and implement a plantwide preventive maintenance system for all equipment and vehicles; e) generate safety and housekeeping policies and monitor effectiveness and compliance; train supervisors on attaining productivity and quality schedules; f) monitor day to day operation of the factory and suggest ways for further improvement; that in consideration of the aforementioned assistance, JSC shall pay DAIWA an annual amount equivalent to JPY6,000,000.00 (Six Million Yen). LexLib 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 . (emphasis supplied) (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 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) Based on the foregoing, the 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 enterprises, fifteen per cent (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. Such being the case, since JSC is not a BOI-registered enterprise, and the payments made by JSC to DAIWA are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, 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, the royalty payments made by JS STEEL CEBU CORPORATION to DAIWA KOHTAI CO., LTD. shall be subject to the preferential tax rate of twenty five per cent (25%) based on the gross amount of royalties. This ruling is being issued on the basis of the 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, (SGD.) LILIAN B. HEFTI OIC, Deputy Commissioner Legal and Inspection Group