ITAD Ruling No. 088-02

May 9, 2002 ITAD RULING NO. 088-02 Art. 12, RP-JAPAN Tax Treaty BIR Ruling 134-96 Asian Transmission Corporation Carmelray Industrial Park, Canlubang Calamba, Laguna Attention: Ms. Luz G. Banaybanay Department Manager Accounting Gentlemen : This refers to your letter dated October 10, 2000 requesting for the renewal of the authority previously granted by this Office relative to the availment of the preferential tax rate on royalties paid to Mitsubishi Motors Corporation of Japan (MMC, for brevity) pursuant to Article 12, paragraphs (3) and (4) of the RP-Japan tax treaty. It is represented that MMC is a non-resident foreign corporation organized and existing under the laws of Japan with office address at No. 33-8 Shiba, 5-Chome Minato-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated October 18, 2000; that Asian Transmission Corporation (ATC, for brevity) is a domestic corporation organized and existing under Philippine laws with address at Carmelray Industrial Park, Canlubang, Calamba, Laguna; that it is registered with the Board of Investments on a pioneer status under Certificate of Registration No. EP-95-123 dated June 9, 1995; that on January 28, 2000, ATC and MMC renewed and amended in certain respects the Manufacturing Patent License and Technical Assistance Agreement ("Principal Agreement" dated December 14, 1979) which amended version is herein referred to as Amendment and Renewal Agreement IV; that MMC and ATC executed, renewed and amended the following agreements as dated, all with a uniform five (5) year term and duly with the Intellectual Property Office: Particulars Date of Agreement Registration No. a. Basic December 14, 1979 0080 b. Amendment & Renewal Agreement I January 30, 1985 0588 c. Amendment & Renewal Agreement II August 9, 1990 1097 d. Amendment & Renewal Agreement III August 28, 1995 1766-A e. Engineering Service Agreement January 10, 1995 1766-A f. Amendment to Engineering Service Agreement August 28, 1995 1766-A g. Amendment & Renewal Agreement IV January 28, 2000 In process 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. (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 (emphasis supplied) xxx xxx xxx" Based on the foregoing, the royalty payments will be taxed at a preferential rate of ten per cent (10%) if the company, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines; 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. Hence, royalty payments made by Asian Transmission Corporation to Mitsubishi Motors Corporation shall be subject to the preferential tax rate of ten percent (10%) of the gross amount of royalties. Furthermore, under Section 108 of the said Code, the royalty payments to be remitted by Asian Transmission Corporation is subject to ten percent (10%) value added tax. Section 4.102-1(b) of Revenue Regulations No. 7-95 provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600-Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." In view of all the foregoing, Asian Transmission Corporation shall be responsible for the withholding of income tax at the rate of 10% of the gross amount of royalties and the value-added tax at the rate of 10% of the contract amount. 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 considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service