ITAD Ruling No. 139-04

November 30, 2004 ITAD RULING NO. 139-04 Article 12 Philippines-Japan BIR Ruling No. 096-81 Joaquin Cunanan & Co . 29th Floor Philam Life Tower 8767 Paseo de Roxas Avenue 1226 Makati City Attention: George T.J. Lavadia Principal, Tax Services Department Gentlemen : This refers to your letter dated January 24, 2001, requesting confirmation of your opinion that the royalties paid by Fuji Electric Philippines, Inc. (FEP) to Fuji Electric Co. Ltd. (FECL) are subject to Philippine income tax at the rate of 25% pursuant to Article 12(2)(b) of the Philippines-Japan tax treaty. It is represented that FECL is a nonresident foreign corporation organized under the laws of Japan with principal address at New Yurakucho Buildings 12-1 Yurakucho 1-Chome, Chiyoda-ku, Tokyo, Japan; that as shown in the Certificate of Corporate Filing/Information dated March 23, 2001 issued by the Securities and Exchange Commission (SEC), FECL was licensed to transact business as a representative office in the Philippines on January 14, 1980 per License No. F-899; that per Certificate of Cancellation of License of a Foreign Corporation with SEC Reg. No. FM-889 dated October 10, 2000, the License issued to FECL to transact business in the Philippines is hereby cancelled; that a Certificate of Withdrawal of License of a Foreign Corporation was issued replacing a previous certificate of withdrawal dated October 10, 2000 erroneously indicating the SEC Reg. No. FM-889, instead of F-889; that per Certification dated June 22, 2004 issued by SEC, the correct registration number of the company was duly indicated; that FEP is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at Carmelray Industrial Park Canlubang, Calamba, Laguna; that on April 1, 1997, FECL and FEP entered into a Technology License Agreement which states among others, that " Licensor grants to Licensee a non-exclusive, non-transferable License to use the technical information, to reproduce and prepare derivate works of the works protected by the copyrights, to practice any and all inventions claimed in the Patents and to exercise all Other Intellectual Property Rights in order to manufacture the Subject Products only in the Territory, 1 and to use, sell and otherwise dispose of the Subject Products worldwide. Such license shall not include the right to sublicense or have made. Subject to the terms and conditions of this Agreement, Licensor hereby grants to Licensee, for the term of this Agreement, a non-exclusive, non-transferable license to use the Trademarks in connection with the Subject Products manufactured by Licensee provided that such Subject Product are manufactured in accordance with specifications and standards established from time to time by Licensor or otherwise approved by Licensor "; that in consideration of said license grant, FECL is entitled to receive a royalty equivalent to five percent (5%) of FEP's net sales of any and all subject products (SP) that are manufactured and sold by FEP during the term of the Agreement; that a Memorandum for Technology License Agreement dated April 20, 1997 was entered into which states that with respect to the "Half Term" from April 1, 1997 to September 30, 1997, the expected total sum of (a) trade, quantity or cash discounts and broker's or agent's commission, (b) return credits and allowances, (c) tax, excise or other government charges, and (d) freight, insurance and packing costs, with respect to the SP which shall be deducted from the total invoice value of the SP in order to calculate the "Net Sales", shall be deemed to be equal to 2.75% of the total invoice value of the SP, in consideration of the result of the preceding half term, thus, the rate of royalty to be paid by FEP for such period shall be equal to 4.86% (97.25% x 5%) of the total invoice value of any and all SP that are sold by FEP during the period; and that this deduction rate for calculating net sales (2.75%) shall continue for successive term, unless it is largely fluctuated. In reply, please be informed that Article 12 of the Philippines-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 . (emphasis supplied) "(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 Investment and engaged in preferred pioneer areas of investment under the investment incentive 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. HIACEa "(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 film and films or tapes for radio or television broadcasting, any patent, trademark, or 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 experiences. "(5) The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. "xxx xxx xxx" Based on the foregoing, royalty payments arising in the Philippines and paid to a resident of Japan will be taxed at the preferential tax rate of ten percent (10%), if the payor is a Board of Investments (BOI) registered enterprise engaged in preferred pioneer areas of investment; 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%) based on the gross amount of the royalties. Such being the case, and inasmuch as the royalties are paid by FEP to FECL under the Agreement in respect of the use of intellectual property rights in order to manufacture the subject products in the Philippines, the royalties paid by FEP to FECL is subject to Philippine income tax at the rate of 25%. Moreover, the royalty payments of FEP to FECL for the grant of right and license are subject to the ten percent (10%) value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, based on the contract price agreed upon by the parties. Accordingly, FEP, 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 fees before making any payment to FECL. In remitting the VAT withheld, FEP 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 FEPI upon filing its own VAT return, if it is a VAT-registered taxpayer. In case FEP 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 "expense" or "asset" whichever is applicable. In addition, FEP is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of FECL, the first three copies thereof to be given to FECL and the fourth copy to be retained by FEP as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR No. 8-2002; Section 7 of RR No. 14-2002] This ruling is issued on the basis on 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service Footnotes 1. Article 1.23 of the Technology License Agreement, "Territory" shall mean the Republic of the Philippines.