ITAD Ruling No. 098-00

August 2, 2000 ITAD RULING NO. 098-00 RP-Japan Article 11 & 12 ITAD 19-99 Royalty Florafe M. Bantayan Director and Controller Philippine-International Manufacturing and Engineering Services Cavite Economic Zone Rosario, Cavite M a d a m : This refers to your application for relief from double taxation dated February 10, 1999 and May 10, 1999, on behalf of International Manufacturing & Engineering Services Co., Ltd. of Japan (IMES); requesting for a preferential tax rate of ten percent (10%) to be withheld both on your royalty and interest payments, pursuant to the RP-Japan Tax Treaty. It is represented that IMES is a corporation established and existing under the laws of Japan with principal business address at #3 Kirihara-cho, Fujisawa-shi, Kanagawa-Ken, Japan; that it is neither registered as a corporation/partnership nor licensed to do business in the Philippines as per certification dated February 25, 1999, issued by the Securities and Exchange Commission (SEC); that Philippines-International Manufacturing and Engineering Service (PIMES) is a domestic corporation established and existing under the laws of the Philippines; that PIMES is a Philippine Economic Zone Authority (PEZA) registered enterprise; that PIMES is 100% fully-owned subsidiary of IMES; that IMES entered into a Technology Transfer Agreement with PIMES dated May 18, 1994; that IMES shall provide technological transfer assistance to PIMES for the development, manufacturing and marketing of TFT LCD, high technology parts and other computer-related hardware and software; that PIMES agreed to pay royalty in the amount equivalent to five (5) percent of the net sales on locally manufactured products; that both entered into a Master Loan Agreement dated June 28, 1999 whereby IMES granted loans to PIMES through the Loan Confirmation Form with inception date as follows: February 1, 1999 JP353,000,000 March 17, 1999 JP50,000,000 March 25, 1999 JP15,000,000 January 18, 1999 JP200,000,000 that the loan interest rate is 6 month Yen TIBOR + 50 bp; and that the purpose of this loan is mainly to finance working capital. SHAcID In reply, please be informed that pertinent portions of Articles 11 and 12 of the RP-Japan Tax Treaty read as follows: Interest "Article 11 "1) Interest 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 interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: "a) 10 per cent of the gross amount of the interest if the interest is paid in respect if Government securities, or bonds or debentures; "b) 15 per cent of the gross amount of the interest in all other cases . (3) Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the interest 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 interest, shall not exceed 10 per cent of the gross amount of the interest. "4) The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. "xxx xxx xxx." Royalties "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. TcEDHa "(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, 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. xxx xxx xxx" Based on the foregoing provisions, the preferential rate of 10%, both on royalty and interest can only be availed of by an entity registered with the Board of Investments (BOI) and engaged in preferred pioneer areas of investment under Executive Order No. 226, otherwise known as the Omnibus Investments Code. Since PIMES is not a BOI-registered enterprise, interest and royalties paid by it are not covered by the provisions of Article 11(3) and Article 12(3) of the RP-Japan Tax Treaty, and therefore, not qualified to avail of the 10% preferential tax rate but rather subject to the 15% and 25% tax rates, respectively, under Article 11(2) and Article 12(2)(b) of the same treaty. (ITAD Ruling 19-99 dated August 18, 1999). 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group