ITAD Ruling No. 108-00

August 9, 2000 ITAD RULING NO. 108-00 RP-Korea Art. 12 129-98 ITAD #54-00 Daeduck Philippines, Inc. Philippine Economic Zone Authority Lot No. 1-13, Blk. 20, Phase 4, Main Avenue Rosario, Cavite Attention: Jae Yeol Lim Accounting Division Manager Gentlemen : This refers to your application for tax treaty relief dated June 15, 2000, requesting for 10% preferential tax rate on royalty payments of your company to Daeduck Electronics Co. Ltd. (Daeduck-Korea) by virtue of the RP-Korea Tax Treaty. It is represented that Daeduck Philippines Inc. (Daeduck-Phils.) is a domestic corporation organized and existing under Philippine laws and duly registered as an enterprise at Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 96-038; that Daeduck-Korea is a non-resident foreign corporation organized and existing under the laws of the Republic of Korea with business address at 390-1 Moknai Dong Ansan Si, Kyunggi Do, Korea; that Daeduck-Phils. entered into a Technical License Agreement with Daeduck-Korea effective for five years from March 16, 1996 and renewable by mutual consent; that under the said Agreement, Daeduck-Korea grants Daeduck-Phils. an exclusive license to use the technical information for the manufacture of the PCB Products (printed circuit board products); and that in consideration for such grant , Daeduck-Phils. shall pay royalties to Daeduck-Korea in the amount equivalent to 5% Net Sales for the Multi layer PCB and 2.5% Net Sales for Double side PCB. In reply, please be informed that Article 12 of the RP-Korea Tax Treaty states that: "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 if such resident is the beneficial owner of the royalties." "2. However, such royalties may be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed 15 per cent of the gross amount of the royalties." "3. Notwithstanding the provisions of paragraph 2 hereof, 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 Korea, who is the beneficial owner of the royalties, shall not exceed 10 per vent of the gross amount of the royalties." HTASIa "4. The term royalties as used in this Article means payments of any kind received as a consideration for the use of, or right to use, any copyright of literary, artistic or scientific work, 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, and includes payments of any kind in respect of motion picture films and works on films or videotapes for use in connection with television or tapes for the use of radio broadcasting." xxx xxx xxx" The foregoing RP-Korea Tax Treaty provision allows a 10% preferential tax rate on royalty payments if the paying company is registered with the Board of Investments and engaged in preferred pioneer areas of investments and 15% in all other cases as long as the recipient of the royalty payments is the beneficial owner and a resident of a Contracting State. Inasmuch as Daeduck-Phils. is not registered and not engaged in preferred areas of activities in the Philippines in accordance with the above-quoted Article 12(3), royalties arising in the Philippines and payable to Daeduck-Korea are subject to Philippine tax at the rate of 15% of the gross amount of royalties pursuant to Article 12(2) of the RP-Korea Tax Treaty, contrary to your opinion that said royalties are subject to the preferential tax rate at 10%. ( BIR Rulings 129-98 and ITAD 54-00 ) This ruling is being issued on the basis of the foregoing representation. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group