ITAD Ruling No. 104-00

August 7, 2000 ITAD RULING NO. 104-00 RP-Japan Article 12 Sec. 108 7-86 96-81 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Centre 6805 Ayala Avenue 1226 Makati City Attention: Atty. George J. Lavadia Principal Tax and Corporate Services Gentlemen : This is in connection with your application for tax treaty relief dated September 22, 2000, with respect to the royalties payable by your client, GNF Philippines, Inc. (GNF) to Ammic Corporation (Ammic) pursuant to Article 12 (2)(b) of the RP-Japan Tax Treaty. It is represented that Ammic is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is nor registered as a corporation/partnership in the Philippines as per certification dated February 11, 2000 issued by the Securities and Exchange Commission (SEC); that the Ammic Corporation registered with the SEC under License No. AF095000063 is a representative office of Ammic in the Philippines as per Certificate of Registration and License dated June 9, 1995 issued by SEC; that the said representative office was established with the following functions: a) dissemination of foreign market information, b) promotion for export of Philippine products, particularly non-traditional products and products presently being distributed in the Philippines, c) to act as message/communication center between interested parties and head office, d) to render, assist and give technical know-how and training to existing and future customers of the companys products, e) to provide and facilitate better communication and contact between its head office and affiliated companies on one hand and present and future customers on the other hand, f) to inform potential customers of price quotations of the head office and affiliated companies, g) to attend the needs of the end users of its products in the Philippines; that GNF is a domestic corporation duly organized and existing under the laws of the Philippines; that on July 17, 1997, Ammic and GNF entered into a Software License Agreement whereby Ammic will grant GNF a non-exclusive right to use its computer-application software; that in consideration for such grant, Ammic shall receive royalty payments in the amounts set forth in the schedule/s provided under the Agreement; and that the License Agreement has been duly registered with the Bureau of Patents, Trademarks and Technology Transfer on October 20, 1997 under Certificate of Registration No. 2027. In reply, please be informed that Article 12 (2)(b) of the RP-Japan Tax Treaty provides: DaIACS 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 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 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" Based on the foregoing, the royalty payments will be taxed at the preferential tax rate not exceeding ten per cent (10%) if the payor is a Board of Investments (BOI) registered enterprise, fifteen per cent (15%) if the payments are in respect of the use of or the right to use cinematograph films and 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 royalties. Such being the case, since GNF is not a BOI-registered enterprise, and the payments made by GNF to Ammic are not in respect of the use or the right to use cinematograph films and films or tapes for radio and television broadcasting, the herein payments are subject to tax at the rate of 25 per cent on the gross amount of royalties pursuant to the RP-Japan Tax Treaty. ( BIR Ruling Nos. 96-81 and 7-86 ) Moreover, the said royalties based on the net sales shall be subject to 10 percent value added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. GNF shall, before making payments of royalties to Ammic, withhold and remit to this Bureau the said 10 percent VAT due thereon by filing a separate VAT return for and on behalf of Ammic. The duly validated VAT declarations/return is sufficient evidence in claiming input tax credit. ( Section 4.110-3(b) of Revenue Regulations No. 7-95 ) In fine, the royalties to be paid by GNF Philippines, Inc. (GNF) to Ammic Corporation (Ammic) is subject to tax at the rate 25 per cent. Furthermore, GNF shall, on behalf of Ammic, withhold the 10 per cent VAT due by filing a separate VAT return for Ammic using BIR Form 1600. 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. TcSHaD Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group