ITAD Ruling No. 099-02

May 22, 2002 ITAD RULING NO. 099-02 RP-Japan, Article 11 & 12 NIRC, Sec. 180 BIR Ruling No. DA-ITAD-30-99 BIR Ruling No. DA-ITAD-24-00 C.L. Manabat & Co. 5th Floor Salamin Building 197 Salcedo St., Legaspi Village 1229 Makati City Attention: Atty. Jenalyn R. Carabeo-Suarez Tax Service Gentlemen : This refers to your letter dated March 18, 2002 requesting confirmation of your opinion that the interest and royalty payments made by your client, Chiyoda Integre Philippines, Inc. (Chiyoda Philippines), to Chiyoda Integre Co. (S) Pte. Ltd. (Chiyoda Singapore) are subject to the preferential withholding tax rate of 15 percent (15%) and 25 percent (25%), respectively, pursuant to the RP-Singapore tax treaty. It is represented that Chiyoda Singapore is a non-resident foreign corporation duly organized and existing under the laws of Singapore with principal office address at 2 Woodlands Sector, 1#01.16 Woodlands Spectrum, Singapore; 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 dated December 19, 2001; that Chiyoda Philippines is a corporation duly organized and existing under Philippine laws and duly registered with the Philippine Economic Zone Authority (PEZA); that on December 8, 2000, a Loan Agreement was entered into by and between Chiyoda Singapore and Chiyoda Philippines whereby the former agreed to lend the latter the amount of Five Hundred Thousand United States Dollars (US$500,000.00) with an interest rate of five percent (5%) per annum. It is also represented that on June 20, 2001, a License Agreement was entered into by and between Chiyoda Singapore and Chiyoda Philippines whereby the former granted the latter a non-exclusive, non-transferable license to manufacture electrical and mechanical components and parts for computers, house appliances, automobiles, etc.; that said License Agreement was registered with the Intellectual Property Office under Certificate of Compliance No. 5-2002-00037 dated March 5, 2002; and that in consideration of the aforementioned rights conferred to Chiyoda Philippines, Chiyoda Philippines shall pay Chiyoda Singapore a royalty of three percent (3%) per annum of the Net Selling Price of the licensed products manufactured, used or sold by Chiyoda Philippines. In reply, please be informed that Article 11 of the RP-Singapore tax treaty provides as follows: "Article 11 Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may be taxed in the Contracting State in which it arises, and according to the law of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. (emphasis supplied) 3. 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, as well as income assimilated to income from money lent by the taxation law of the State in which the income arises, including interest on deferred payment sales. Penalty charges for late payment shall not be regarded as interest for purposes of this Article. xxx xxx xxx" Therefore, since Chiyoda Singapore is the beneficial owner of the interest payments, this Office confirms your opinion that the interest payments of Chiyoda Philippines to Chiyoda Singapore are subject to the preferential tax rate of 15 percent pursuant to Article 11(2) of the RP-Singapore tax treaty. (BIR Ruling No. DA-ITAD-30-99 dated October 7, 1999) As regards the royalty payments, Article 12 of the same treaty provides, viz : "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 State. 2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: (a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; (b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; (c) in all other cases, 25 per cent of the gross amount of the royalties. (emphasis supplied) 3. 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 cinematographic films or tapes for television or 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" Documents submitted show that Chiyoda Philippines is neither registered with the Philippine Board of Investments (BOI) nor engaged in preferred areas of activities in the Philippines, and that payments are not in respect of cinematographic films or tapes for television or broadcasting. Therefore, this Office is of the opinion and so holds that the royalty payments by Chiyoda Philippines to Chiyoda Singapore are subject to the preferential withholding tax rate of 25% of the gross amount of royalties pursuant to Article 12(2)(c) of the RP-Singapore tax treaty. (BIR Ruling No. DA-ITAD-24-00 dated January 28, 2000) Finally, the Loan Agreement entered into by and between Chiyoda Singapore and Chiyoda Philippines is subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. This ruling is issued on the basis of the foregoing 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