ITAD Ruling No. 115-02

June 4, 2002 ITAD RULING NO. 115-02 RP-Japan, Art. 12 (2) (b) BIR Ruling No. ITAD 41-01 Mitsuwa Philippines, Inc. Lot 4, 6, 8 Block 22 Phase IV Cavite Economic Zone Rosario, Cavite Attention: Mr. Kanji Hashimoto Factory Manager Gentlemen : This refers to your letter dated September 10, 2001 requesting confirmation of your opinion that your royalty payments to Mitsuwa Chemical Company, Ltd. (Mitsuwa-Japan) of Japan are subject to the preferential tax rate of 25% pursuant to Article 12 of the RP-Japan tax treaty. It is represented that Mitsuwa-Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal address at 18-8 Nakado, Hiratsuka City, Kanagawa Pref., Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines as evidenced by Certificate of Non-Registration dated August 6, 2001 issued by the Securities and Exchange Commission (SEC); that Mitsuwa Philippines Inc. (Mitsuwa-Phil) is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at Lots 4, 6, 8 Block 22 Phase IV, Cavite Economic Zone, Rosario, Cavite; that on August 23, 2001, Mitsuwa-Japan entered into Technological Transfer and Assistance Agreement with Mitsuwa-Phil, a PEZA registered corporation with Certificate of Registration No. 94-65 dated September 12, 1994; that in the said agreement, Mitsuwa-Japan granted Mitsuwa-Phil the right to use the technology and acquire technical information for the manufacture and assembly of the plastic parts for "Licensed Products of Sanyo, Alpine, Yuchin, Clarion, Epson, Fujitsu, Kenwood, Sharp and for other licensed products of other companies; technical information and know-how to fabricate, produce and repair of plastic injection moulds, jigs and other tools employed or related in the manufacture of said plastic products"; that as a consideration for the technology transfer and assistance provided for under the agreement, Mitsuwa-Phil shall pay Mitsuwa-Japan an amount equal to 3% of the CIF 1 price of the plastic parts moulds fabrication and repair of the aforementioned licensed products. In reply, please be informed that Article 12 of the RP-Japan tax treaty provides as follows: "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 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. xxx xxx xxx "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. Based on the foregoing, the royalties arising in the Philippines and paid to a resident of Japan shall also be taxable in the Philippines. Thus; this Office is of the opinion and so holds that the royalty payment of Mitsuwa Philippines Inc. to Mitsuwa Chemical Company Ltd., being the beneficial owner of the royalties in the amount equivalent to 3% of the CIF Price, shall be subject to a preferential tax rate of 25% pursuant to Article 12(2)(b) of the RP-Japan tax treaty. (BIR Ruling No. ITAD 41-01 dated April 10, 2001) This ruling is issued based on the 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 Footnotes 1. Cost Insurance Freight the cost including freight said insurance but excluding all other charges like taxes and other government charges; other related sales/shipping costs like packaging, bank charges, brokers and agents' commission and other similar charges (if any) which are billed separately or as a separate item on the invoice if applicable.