ITAD Ruling No. 087-05

August 26, 2005 ITAD RULING NO. 087-05 Art. 12 of the Philippines-Japan tax treaty BIR Ruling No. DA-ITAD-35-03 Nagase Philippines Corporation 18-B Trafalgar Plaza H.V. Dela Costa St., Salcedo Village, Makati City Attention: Masanao Furuse President Gentlemen : This refers to your letter dated December 16, 2004, requesting for the availment of the 25% preferential tax rate for the royalty payment made by Nagase Philippines Corporation (Nagase-Phil) to Nagase & Company, Ltd. (Nagase-Japan), pursuant to the Philippines-Japan tax realty. aEHAIS It is represented that Nagase-Japan is a nonresident foreign corporation duly organized and existing under the laws of Japan, with office address at 5-1 Nihonbashi-Kobunacho, Chuo-ku, Tokyo 103-8355, Japan; that Nagase-Japan was licensed by the Securities and Exchange Commission to establish its regional or area headquarters in the Philippines on July 31, 1981 under SEC Registration no. FM-311, however, said license was cancelled per Certificate of Cancellation of a License of a Multinational Company to Establish a Regional or Area headquarters approved on February 15, 1984; that Nagase-Phil is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 18B Trafalgar Plaza H.V. Dela Costa St.,Salcedo Village, Makati City 1227; that on January 1, 2004, Nagase-Japan and its affiliates, including Nagase-Phil and General Electric Company and its affiliates (GE) entered into a Sales Representative and Distributor Agreements (Principal Agreements) for sales and distributions of the products manufactured by GE in the Philippines, Singapore, Thailand, Malaysia, Indonesia and Vietnam (collectively called, the Territories);that on July 26, 2004, Nagase-Japan and Nagase-Phil entered into a Royalty Agreement (Agreement);that under the Royalty Agreement, Nagase-Japan grants Nagase-Phil the right to sell and distribute its products in the territories throughout the period of the Principal Agreements, and that Nagase-japan is to act for and on behalf of its affiliates as the principal contractor with GE; that in consideration of the grant and of the fact that Nagase-Japan acquired the distributorship and sales representative right from GE on behalf of Nagase-Phil, Nagase-Phil shall pay Nagase-Japan royalty on sales of the products to the customer in the Philippines, with a rate of 0.75% on the sales of the products to the customers; and that the duration of the said Agreement is from April 1, 2004 December 31, 2006, provided, however, that in case the principal agreements terminated, said Agreements shall automatically be terminated. CHDAaS In reply, please be informed that Article 12 of the Philippines-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 Contacting 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 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, 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" Such being the case, and since Nagase-Phil is not engaged in preferred pioneer areas of investment under Executive Order No. 226, otherwise known as the Omnibus Investment Code of the Philippines, the royalties to be remitted by Nagase-Phil to Nagase-Japan relative to the aforementioned Royalty Agreement shall be subject to tax at 25% of the gross amount of royalties pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-35-03 dated February 13, 2003) Finally, the said royalty fees to be paid by Nagase-Phil to Nagase-Japan under the Royalty Agreement are subject to the 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, Nagase-Phil, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% VAT on such royalty fees before remitting any payment to Nagase-Phil. In remitting the VAT withheld, Nagase-Phil shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Nagase-Phil upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case Nagase-Phil is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition, Nagase-Phil is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of Nagase-Japan, the first three copies thereof to be given to Nagase-Japan and the fourth copy to be retained by Nagase-Phil as its file copy, [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service