ITAD Ruling No. 103-01

October 29, 2001 ITAD RULING NO. 103-01 RP-Japan-Art. 12 BIR Ruling No. ITAD-178-00 Nidec-Shimpo Philippines Corporation 119 Technology Avenue SEZ, Laguna Technopark, Bian, Laguna Attention: Mr. Hiroshi Sano President Gentlemen : This refers to your letter dated December 08, 2000 requesting for confirmation that the applicable tax rate to be withheld on your royalty payments to NIDEC-SHIMPO CORPORATION, JAPAN (NSC) is ten (10%) per cent of the gross amount of the royalties as set forth under Article 12(3) of the RP-Japan Tax Treaty. It is represented that NSC is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office at 1 Terada Kohtari, Nagaokakyo City, Kyoto, Japan; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification dated November 22, 2000 issued by the Securities and Exchange Commission (SEC); that NIDEC-SHIMPO PHILIPPINES, CORPORATION (SCF), on the other hand, is a Philippine Economic Zone Authority (PEZA)-registered wholly-owned subsidiary of NSC, engaged primarily in manufacturing speed reducers, adjustable speed drives, speed control motors, electronic components/parts for colored TV, colored computer monitor and other electronic and mechanical instruments of similar nature; that on April 01, 1997, SCF, desirous to obtain and receive a license and technology transfer assistance for the development, manufacture and marketing of speed reducers, adjustable speed drives, speed control motors and other electronic and mechanical instruments, entered into a Technical Assistance Agreement with NSC whereby NSC will grant SCF the right to perform development, manufacturing and marketing activities using the NSC-transferred technical information; that in consideration for the grant, SCF shall pay royalty to NSC in the amount equivalent to five (5%) per cent of SCF's net sales on locally manufactured licensed products using the technical data and information. Based on the foregoing representations and pursuant to Article 12 of the RP-Japan Tax Treaty which provides, viz: "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." "xxx xxx xxx" it is your opinion that since SCF is a PEZA-registered enterprise whereby the tax incentives laws that are being applied are the same as that with the Philippine Board of Investments (BOI), the herein royalty payments are subject to the preferential tax rate of ten (10%) per cent. In reply, please be informed that pursuant to the aforementioned Treaty, it is explicit that the royalty payments will be taxed at the preferential tax rate of ten (10%) per cent if the payor is a Board of Investments (BOI)-registered enterprise, fifteen (15%) per cent 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 (25%) per cent of the gross amount of the royalties. Such being the case, since SCF is not a BOI-registered enterprise, and the payments made by SCF to NSC 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 are subject to the 25% rate under Article 12(2)(b) of the RP-Japan Tax Treaty. (BIR Ruling No. ITAD-178-00) Hence, the royalty payments made by NIDEC-SHIMPO PHILIPPINES CORPORATION are subject to the preferential tax rate of twenty-five (25%) per cent based on the gross amount of royalties, contrary to your opinion that the applicable rate is 10%. This ruling is 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, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group