ITAD Ruling No. 123-01

2001 ITAD RULING NO. 123-01 Article 12, RP-Japan Tax Treaty BIR Ruling No. ITAD 39-99 Nanox Philippines, Inc. 1E-5 Clark Premiere International Park M.A. Roxas Highway Clark Special Economic Zone Clark Field, Pampanga Attention: Mr. Katsuhiro Takahashi Director/VP Administration Gentlemen : This refers to your letter dated February 8, 2001 requesting confirmation of your opinion that your royalty payments to Nanox Corporation (Nanox Japan) are subject to the preferential withholding tax rate of ten per cent (10%) pursuant to Article 12 of the RP-Japan Tax Treaty. It is represented that Nanox Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification dated April 24, 2001 issued by the Securities and Exchange Commission (SEC); that Nanox Philippines, Inc. (Nanox Philippines) is a domestic corporation duly organized and existing under the laws of the Philippines and a Board of Investments (BOI)-registered enterprise as per Certificate of Registration No. EP 99-079; that on April 1, 2000, Nanox Philippines, in its desire to engage in the business of manufacturing and selling of liquid crystal display products of Nanox Japan and to acquire the right to use the know-how and other technical information relating thereto, entered into a Technical and Management Service Agreement with Nanox Japan whereby the latter shall grant Nanox Philippines the right to use within the Philippines such know-how and to provide consultancy services relative thereto to Nanox Philippines; that it shall enable Nanox Philippines to manufacture and sell the Licensed Products of Nanox Japan and develop or expand its crystal display business; that said Agreement shall continue in full force for ten (10) years and shall be automatically renewed for another ten (10) year period thereafter; that in consideration for the grant of such technology and privilege, Nanox Japan shall be entitled to receive running royalty of two per cent (2%) of the net sales of the Licensed Products during the same royalty period; that the term net sales refers to the invoiced amount of the Licensed Products sold by Nanox Philippines; and that said Agreement is covered by Certificate of Compliance No. 5-2001-00029 issued by the Intellectual Property Office (IPO). 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. DHcSIT (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 foregoing, the royalty payments will be taxed at the preferential tax rate of ten per cent (10%) if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred pioneer area of investment, fifteen per cent (15%) 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 per cent (25%) of the gross amount of royalties. Such being the case, since Nanox Philippines is a BOI-registered enterprise and engaged in preferred pioneer area of investment as per Certificate of Registration No. EP 99-079, this Office is of the opinion and so holds that the royalty fees to be paid for the use of the know-how and other technological information relating to the manufacturing and selling of liquid crystal display products of Nanox Japan are subject to the preferential tax rate of 10% based on net sales of the Licensed Products sold by Nanox Philippines under Article 12(3) of the RP-Japan Tax Treaty. (BIR Ruling No. 39-99 dated November 3, 1999 in relation to BIR Ruling No. 134-96 dated November 27, 1996) Finally, under Section 108(A)(1) and (3) of the Tax Code, such royalty payments are subject to the 10% value-added tax (VAT). Accordingly, Nanox Philippines shall, before making payment of royalties to Nanox Japan, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for and on behalf of Nanox Japan. The duly validated VAT declaration/return is sufficient evidence for Nanox Philippines in claiming input tax credit. [Section 4.102.1(b) of Revenue Regulations No. 7-95] This ruling is 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group