ITAD Ruling No. 138-02

August 6, 2002 ITAD RULING NO. 138-02 RP-Japan Tax Treaty Art. 10, 11, 12 BIR Ruling No. ITAD 20-99 BIR Ruling No. [UN-417-11-27-95] Nidec Philippines Corporation 136 North Science Avenue Extension, Special Economic Zone, Laguna Technopark, Bian, Laguna Attention: Koichi Yamamoto President Gentlemen : This refers to your application for relief from double taxation dated October 25, 2000, requesting for a ruling to the effect that the dividends, interest, & royalties to be received by Nidec Corporation (Nidec Japan) from Nidec Philippines Corporation (Nidec Philippines) are entitled to relief from double taxation provided under the RP-Japan tax treaty. It is represented that Nidec Japan is a corporation organized and existing under the laws of Japan with principal business address at 10 Tsutsumisoto-cho Nishikyogoku, Kyo-ku, Kyoto, Japan; that Nidec Japan 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 a certification issued by the Securities and Exchange Commission dated October 06, 2000; at Nidec Philippines is a domestic corporation organized and existing under the laws of the Philippines and a wholly-owned subsidiary of Nidec Japan with principal address 136 North Science Ave., Ext. Special Economic Zone, Laguna Technopark, Bian, Laguna; that Nidec Philippines is a Philippine Economic Zone Authority (PEZA)-registered enterprise with Certificate of Registration No. 96-039 dated March 15, 1996; that Nidec Philippines is primarily engaged in manufacturing Spindle Motors and Hard Disc Drive of computers in the Philippines for export to Nidec Japan; that on January 01, 1997, Nidec Philippines and Nidec Japan entered into a Technical Assistance Agreement as evidenced by Certificate of Registration issued by the Bureau of Patents, Trademarks and Technology Transfer; that the agreement shall be effective for a period of not more than ten (10) years starting January 01, 1997 and shall continue to take effect up to December 31, 2006; that Nidec Philippines shall pay Nidec Japan in the amount equivalent to five percent (5%) of Nidec Philippines net sales on locally manufactured licensed products using the technical data said information where net sales shall be computed as the invoice value based on actual sales minus trade, quantity or cash discounts and broker's or agent's commission, if any, return credit allowances, excise tax or other government charges, and freight, insurance and packaging cost; that the payment shall be in the form of United States dollars; that Nidec Philippines entered into a series of loan agreement with Nidec Japan; that the proceeds of such loans are to be used for the acquisition of machineries and equipment to be used in manufacturing spindle motors other computer related products and for its expansion project for the construction of additional clean room which is related to manufacturing spindle motors; that Nidec Japan holds 99.99% of the total subscribed shares of Nidec Philippines; that during the Special meeting of the Board of Directors of Nidec Philippines held last June 15, 2000, the Board of Directors declared cash dividend in the amount of P40.33 per share for the year ended March 31, 2000. In reply, please be informed of the following pertinent provisions of the tax treaty: 1. For Dividends "Article 10 "1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. "2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; "b) 25 per cent of the gross amount of the dividends in all other cases. "xxx xxx xxx "3. ". . . "4. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. "xxx xxx xxx" Based on the above, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent either of the voting shares or of the total shares of the first-mentioned company for the period of six months immediately preceding the date of payments of the dividends. Such being the case, and since Nidec Japan holds 99.99% of the capital stock of Nidec Philippines for a period of six months immediately preceding the date of payment, your application for a preferential tax treaty rate of 10% to be withheld by Nidec Philippines from its dividend remittances to Nidec Japan pursuant to Article 10 of the RP-Japan tax treaty is hereby confirmed. ( BIR Ruling No. ITAD 20-99 ) 2. For Interest "Article 11 "1. Interest 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 interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: "(a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; "(b) 15 per cent of the gross amount of the interest in all other cases. "xxx xxx xxx "5. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. "xxx xxx xxx" Accordingly, the preferential tax rate to be withheld by Nidec Philippines on its interest payments to Nidec Japan shall be fifteen percent (15%) of the gross amount of the interest pursuant to Article 11 of the RP-Japan tax treaty. However, each loan agreement for the series of loans executed by and between them shall be subject to documentary stamp tax imposed under Section 180 of the Tax Code of 1997. 3. For Royalties: "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". According to the above-cited provision, only Board of Investments (BOI) registered companies can avail of the 10 per cent (10%) preferential tax rate. Inasmuch as Nidec Philippines is not registered with the BOI, the amount to be withheld by Nidec Philippines on its royalty payments to Nidec Japan shall be twenty-five percent (25%) of the gross amount of the royalties based on the five percent (5%) net sales of Nidec Philippines on locally manufactured licensed product using the technical data and information where net sales shall be computed as the invoice value based on actual sales minus trade, quantity or cash discounts and broker's or agents commission, if any; return credits and allowances; excise tax or other government charges; and freight, insurance and packaging cost. 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 null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service