ITAD Ruling No. 136-02

August 5, 2002 ITAD RULING NO. 136-02 Article 12, RP-Japan Tax Treaty BIR Ruling No. ITAD 104-01 Noritake Porcelana Mfg., Inc. J.P. Rizal St., Concepcion, Marikina City Attention: Ms. Florencia F. Roxas Vice-President, Finance Gentlemen : This refers to your letter dated December 4, 2001 requesting confirmation of your opinion that your royalty payments to Noritake Co., Limited of Japan (Noritake-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 Noritake-Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office address at 3-1-36 Noritake Shinmachi, Nishiku, Nagoya, 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 per certification dated September 24, 2001 issued by the Securities and Exchange Commission (SEC); that Noritake Porcelana Mfg., Inc. (Noritake-Phil.) is a domestic corporation duly organized and existing under the laws of the Philippines and is a Board of Investments (BOI)-registered enterprise per Certificate of Registration No. EP 74-326; that on January 1, 1998, in its desire to engage in the business of manufacturing and selling of porcelain dinnerware products and to obtain rights to Noritake's trademarks and technical information, Noritake-Phil. entered into a Technical Assistance, Brand Names and Trade Names and Export Agreement with Noritake-Japan whereby the latter shall grant the former non-transferable and exclusive rights, without right to sublicense, to manufacture and sell porcelain and similar tableware products; that Noritake-Japan shall likewise furnish Noritake-Phil. with all of the technical information, materials/equipment, personnel and other necessary media to enable the latter to make adequate use of the technical information; that Noritake-Japan shall also refrain from competing with Noritake-Phil. by exporting similar products in the Philippines; that said Agreement shall continue in full force for five (5) years commencing on the date of effectivity of the Agreement; that in consideration for the grant of such technology and privilege, Noritake-Japan shall receive a royalty fee five per cent (5%) of the net domestic sales amount in the Philippines after deducting ten percent (10%) VAT, discounts and returns. 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 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 Noritake-Phil. is a BOI-registered enterprise and engaged in preferred pioneer area of investment per Certificate of Registration No. 74-326, this Office is of the opinion and so holds that the royalty payments for the use of the know-how and other technological information relating to the manufacturing and selling of porcelain dinnerware products of Noritake-Japan are subject to the preferential tax rate of 10% based on net sales of the Licensed Products sold by Noritake-Phil. under Article 12(3) of the RP-Japan tax treaty. ( DA-ITAD No. 104-01 dated October 30, 2001 ) 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 4.1021(b) of Revenue Regulation No. 7-95 provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use of 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 of 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, Noritake-Phil. shall, before making payment of royalties to Noritake-Japan, 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 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