ITAD Ruling No. 111-02

May 31, 2002 ITAD RULING NO. 111-02 RP-Japan Tax Treaty, Article 12 & 15 Tax Code of 1997, Section 25 (A) & Section 108 (A) (3) BIR Ruling Nos. 120-84; 026-94 & DA-ITAD-141-00 Aichi Forging Company Of Asia, Inc. Barrio Pulong, Sta. Cruz Santa Rosa, Laguna Attention: Takashi Nanya EVP-Finance & Treasurer Gentlemen : This refers to your letter dated November 19, 2001 requesting for approval to use the 10% preferential tax rate on royalty payments of AICHI FORGING COMPANY OF ASIA, INC. (Aichi Forging) to AICHI STEEL CORPORATION (Aichi Steel) pursuant to the RP-Japan tax treaty. It is represented that Aichi Steel (formerly Aichi Steel Works, Ltd.) is a corporation organized and existing under the laws of Japan with principal address at 1, Wano-wari, Arao-machi, Tokai-shi Aichi-ken, Japan; that Aichi Steel is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated July 10, 2000; that Aichi Forging is a domestic corporation with principal address at Barrio Pulong, Sta. Cruz, Santa Rosa, Laguna, registered as a preferred pioneer enterprise with the Board of Investments evidenced by Certificate of Registration No. 74-336; that on July 1, 1996 a Technical Assistance Agreement (TAA) was entered into by and between Aichi Forging and Aichi Steel whereby Aichi Steel agreed to grant a non-transferable license to use technical information and know-how in connection with the manufacturing of Hot Forged Products; that Aichi Forging shall pay a technical assistance fee of P40,000.00 per one (1) man-one (1) month for technical assistance by engineers of Aichi Steel; that Aichi Forging shall pay a royalty of P50,000.00 per month for general consultation fee; that the amount for the general consultation fee shall be reviewed three years thereafter; that the TAA covered the period from July 1, 1996 to June 30, 1999, and was extended up to December 31, 1999; that on January 1, 2000, a Technical Assistance Extension Agreement (Extension Agreement) was entered into by and between Aichi Forging and Aichi Steel whereby the TAA shall be extended for another three (3) years after its expiration and shall continue to be in full force and effect up to December 31, 2002; that under the Extension Agreement, Aichi Forging shall pay Aichi Steel a technical assistance fee of Philippine Pesos Ten Thousand (P10,000.00) per one (1) man-one (1) day and a royalty computed at 2% of sales value of Toyota Autoparts Philippines, Inc. as general consultation fee; that the TAA has been duly registered with the Bureau of Patents and Trademarks and Technology Transfer as evidenced by a Certificate of Registration No. 1893 dated November 6, 1990. In reply, please be informed that Article 12 of the RP-Japan tax treaty provides as follows: "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. "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. (emphasis supplied) "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, 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 abovequoted provision, royalties arising in the Philippines and paid by a Philippine corporation registered with the Board of Investments to a resident of Japan who is the beneficial owner of the royalties shall be subject to tax not to exceed 10 percent of the gross amount of the royalties. Such being the case, and since Aichi Forging is registered with the Board of Investment, royalties arising in the Philippines and paid to Aichi Steel (Japan resident) shall be subject to a tax at 10 percent of the gross amount of royalties. ( BIR Ruling 120-84; 026-94 ) As regards the salaries which the representatives of Aichi Steel may derive in rendering technical assistance to Aichi Forging, Article 15 of the same treaty provides: "Article 15 "(1) Subject to the provisions of Article 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State. "(2) Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned Contracting State if: "(a) the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and "(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State, and "(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other Contracting State. "xxx xxx xxx" Thus, the salaries, wages or similar remuneration which a representative of Aichi Steel may derive in rendering technical assistance to Aichi Forging, to assist in the manufacturing of the products from July 1996 onwards, may be exempt from Philippine income tax if all the conditions set forth in subparagraphs (a), (b) and (c) of Article 15(2) are satisfied. Otherwise, the said income shall be subject to the rate of tax provided for under Section 25(A) of the National Internal Revenue Code of 1997 on either a resident alien or a nonresident alien engaged in trade or business within the Philippines. ( BIR Ruling No. ITAD 141-00 ) Moreover, the said royalty payments shall be subject to the 10% value-added tax (VAT) under Section 108(A)(1) and (3) of the Tax Code of 1997. Section 4.102-1(b) of Revenue Regulation No. 7-95 provides that: "The VAT on rental and/or royalties payable to a non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600 Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." Accordingly, Aichi Forging shall, before making payment of royalties to Aichi Steel, withhold and remit to this bureau the value-added tax at the rate of 10% of the contract amount and the income tax at the rate of 10% of the gross amount of royalties. This ruling is issued based 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