ITAD Ruling No. 139-00

September 19, 2000 ITAD RULING NO. 139-00 RP-US RP-Russia ITAD #121-00 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: R . M . C . Vinzon Tax Division Gentlemen : This refers to your application for tax treaty relief dated February 17, 2000 requesting, on behalf of Hitec Park Inc. ( HITEC ), confirmation of your opinion that payment of royalties to Hitec Radio Control USA Inc. ( RCD ) will be subject to the preferential tax rate of 15% citing the "most favored nation" clause of the RP-US Tax Treaty in relation to the RP-Russia Tax Treaty. It is represented that RCD is a non-resident foreign corporation duly organized and existing: under the laws of California with principal office located at 10729 Wheatlands Avenue, Suite C, Santee, CA 90271 USA; that it is not registered as a corporation/partnership in the Philippines, as per certification dated February 24, 2000 issued by the Securities and Exchange Commission; that HITEC is a PEZA registered corporation with Certificate of Registration No. 96-082 dated July 3, 1996, organized and existing under the laws of the Philippines with principal office located at Bldg. 2D, Gabriel Industry Complex, Block 23, Phase 4, CEPZ, Rosario Cavite, Philippines; that HITEC entered into a Royalty Agreement with RCD dated January 5, 1999; that RCD granted HITEC the use of trademark on all products manufactured and exported in accordance with the provisions of the Agreement; that HITEC agreed to pay royalty at six percent (6%) of the FOB Philippines amount of the sales of products bearing the name of " RCD "; that the royalty will be based on gross sales and will not be affected whether the sales proceeds were collected or not; that royalty shall be tabulated at the end of every quarter, namely March 31, June 30, September 30, December 31 of each year; and that the royalty payment shall be remitted to the grantor's designated bank account within 45 days from the end of each quarter. In reply, please be informed that Article 13 of the RP-US Tax Treaty provides, viz : "ARTICLE 13 1. Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2. However, the tax imposed by that other Contracting State shall not exceed; a.) In the case of the United States 15 percent of the gross amount of the royalties and HCATEa b.) In the case of the Philippines the least of: (i) 25 per cent of the gross amount of the royalties, (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities, and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. xxx xxx xxx" The "most favored nation" clause under Article 13 (2)(b)(iii) of the RP-US Tax Treaty calls for the application of Article 12 of the RP-Russia Tax Treaty which 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 State. 2. However; the royalties may also be taxed in the Contracting State in which they arise and according to the laws of the State but the tax so charged shall not exceed 15 per cent of the gross amount of royalties. xxx xxx xxx" In view of the aforecited provisions and as it appears that the lowest rate of Philippine tax imposed on royalties of the same kind paid under similar circumstances is that provided under the RP-Russia Tax Treaty, we hereby confirm your opinion that the payment of royalties by HITEC to RDC is subject to fifteen percent (15%) tax rate. The said tax rate shall be withheld and paid under similar circumstances as provided in the RP-US Tax Treaty.( BIR Ruling ITAD No . 121-00) This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group