ITAD Ruling No. 134-05

November 15, 2005 ITAD RULING NO. 134-05 Article 12, Philippines-Japan Tax Treaty BIR Ruling No. ITAD 217-02 Pilipinas Hino Incorporated Industrial Park Road, Canlubang Industrial Estate Canlubang, Calamba City, Laguna Attention: Ms. Visitacion A. Mejia Accounting Manager Gentlemen : This refers to your application for tax treaty relief dated August 24, 2005 requesting confirmation of your opinion that the royalty payments paid by your company to Hino Motors, Ltd. (HML) under Technology Cooperation and Technology Transfer Agreements are subject to the preferential final withholding tax rate of twenty-five percent (25%) pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. It is represented that HML is a nonresident foreign corporation duly established in accordance with Japanese Commercial Law with registered office address at 1-1 Hinodai 3 Chome, Hino-shi, Tokyo, Japan, as certified by the Tokyo Chamber of Commerce and Industry on August 3, 2005; that HML is engaged in the business of manufacturing and supplying the motor vehicles known as the Hino trucks, and buses (hereinafter referred to as Hino Products), and possesses technical know-how and technical information with respect to developing, manufacturing and testing of the Hino Products and their component parts thereof through its research, development and experience for many years; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated September 2, 2005; that Pilipinas Hino Incorporated (PHI) is a corporation organized and existing under the laws of the Philippines with principal address at Industrial Park Road, Canlubang Industrial Estate, Canlubang, Calamba City, Laguna; that PHI, in its desire to manufacture the Hino Products in the Philippines, entered into two Agreements with HML, namely: (1) a Technical Cooperation Agreement (TCA) and (2) a Technology Transfer Agreement (TTA); that under the TCA, HML agreed to grant a non-exclusive, non-divisible, non-transferable and non-assignable manufacturing license and the non-transferable right to sell the Hino Products in the Philippines and to provide/render the following services, but not limited to: (a) ordinary assistance by furnishing technical know-how, information, data, etc. relating to the licensed products, (b) additional assistance by furnishing manufacturing, engineering and other know-how and information relating thereto and which are not readily available in HML's record, (c) training of PHI's personnel, (d) dispatch of HML's instructors, (e) technical cooperation for Hino non-original parts, (f) export of licensed products, (g) approval of the local parts, (h) inspection of quality of the licensed products, (i) use of local suppliers; that in consideration thereof, PHI shall pay HML, semi-annually, a running royalty equivalent to three percent (3%) of the "Local Value Added" of those licensed vehicles and unit local parts, respectively; that the TCA shall come into effect on the 1st day of April 2005 and remain effective until the 31st of March 2006, unless earlier terminated under Article 28 thereof; and that under the TTA, HML and PHI agreed and confirmed the following: (a) renewed TTA on the expiration date of TTA subject to the same terms and conditions of TTA without the instrument of such renewal of TTA, (b) the duration of the renewal, which is from the 17th day of December 2001 to the 31st day of March 2005, (c) that PHI has an obligation to pay HML the running royalty under the renewed TTA, (d) such running royalty is a total of One Hundred Fifty-Nine Thousand Eight Hundred Ninety-Six Pesos and 20/100 (P159,896.20), converted into Japanese Yen, (e) in the event that it is necessary to obtain the Philippine Government's approval regarding the Memorandum entered into between HML and PHI on May 2005, PHI shall obtain such approval on its own responsibility. AcICTS In reply, please be informed that Article 12 of the Philippines-Japan tax treaty provides: "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. (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 aforecited, royalty payments arising in the Philippines will be taxed at the preferential tax rate of ten percent (10%), if the payor is registered with the Philippine Board of Investments (BOI) and engaged in preferred pioneer areas of investment in the Philippines; fifteen percent (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 percent (25%) of the gross amount of the royalties. Such being the case and since PHI is not a BOI-registered enterprise, and its payments to HML under the Agreements are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the said royalty payments are subject to the preferential tax rate of twenty five percent (25%) of the gross amount thereof pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-217-02 dated December 27, 2002) cEAHSC Relative to the issue on value-added tax (VAT), Section 108 of the Tax Code of 1997 states that the lease or use of property or property rights is embraced within the definition of "sale or exchange of services" and is subject to VAT. Accordingly, PHI, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT on such royalties before making any payment to HML. In remitting the VAT withheld, PHI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by PHI upon filing its own VAT return, if it is a VAT-registered taxpayer. In case PHI is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as an "expense" or as an "asset", whichever is applicable. In addition, PHI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to HML upon its request and the fourth copy to be retained by PHI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service