ITAD Ruling No. 128-02

August 2, 2002 ITAD RULING NO. 128-02 Art. 12 of RP-Japan BIR Ruling No. ITAD 41-01 Philippines TRC, Inc. Lima Technology Center Special Economic Zone 4217 Lipa City, Batangas Attention: Mr. Akio Nakane Finance Manager Gentlemen : This refers to your application for relief from double taxation dated May 2, 2002 requesting confirmation of your opinion that the royalty payments by Philippines TRC, Inc. (PTI) to Toshin Rubber Co., Ltd. (Toshin) of Japan are subject to the preferential tax rate of twenty five percent (25%), pursuant to Article 12 of the RP-Japan tax treaty. It is represented that Toshin is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal address at 192-4, Minamiyamanoue, Azabu, Oaza, Miyoshi-cho, Nishikamo-gun, Aichi, 470-0206, Japan; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by Certificate of Non-Registration dated September 17, 2001 issued by the Securities and Exchange Commission; that PTI is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at EPI Unit 1, Lima Technology Center, Lipa City, Batangas; that PTI is a PEZA registered corporation engaged in the manufacture and assembly of rubber, plastic and metal parts for printers, fax machines and related business machines; that on April 1, 2001, Toshin entered into a License and Technical Assistance Agreement with PTI; that under the said Agreement, Toshin shall provide PTI with technical information and know-how relative to the operation and maintenance of the latter's equipment as well as the manufacture of its products; that Toshin's technical personnel shall be sent to provide technical instruction and information to PTI or, if necessary, PTI may request Toshin to train its personnel in Japan to obtain the level of technical competence and experience required in the maintenance of its own machineries and equipment including the manufacture of its products as well as for the efficient operation of its business in the Philippines; that in consideration of such services, Toshin shall be entitled to receive royalties from PTI at the rate of three percent (3%) of the latter's gross sales. 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. "xxx xxx xxx." Based on the foregoing, 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 payments of PTI to Toshin, being the beneficial owner of the royalties, in the amount equivalent to three percent (3%) of PTI's gross sales, shall be subject to a preferential tax rate of 25%, pursuant to Article 12 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