ITAD Ruling No. 141-02

August 6, 2002 ITAD RULING NO. 141-02 Article 12, RP-Japan tax treaty BIR Ruling No. DA-ITAD-79-02 Nippon Paint Philippines, Inc. Hologram St., Light Industry and Science Park of the Philippines Cabuyao, Laguna Attention: Ms. Aileen Regina B. Lomotan Finance and Accounting Manager Gentlemen : This refers to your letter dated November 22, 2001 requesting relief from double taxation on your royalty payments to Nippon Paint Co., Ltd., (NPC), pursuant to the RP-Japan tax treaty. It is represented that NPC is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at 1-2, 2-Chome, Oyodokita, Kita-ku, Osaka, 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 issued by the Securities and Exchange Commission dated February 14, 2002; that Nippon Paint Philippines, Inc. (NPP), on the other hand, is a corporation duly organized and existing under the laws of the Philippines; that on October 01, 2000, a Technical Management Service Agreement was entered into by and between NPP and NPC whereby the latter agrees to provide to the former on a non-exclusive basis, coatings and other related products; that in consideration for NPC's services, NPP shall pay technical management service fees; that the said Service Agreement complies with the provisions of the Intellectual Property Code per Certificate of Compliance No. 5-2001-00037 issued by the Intellectual Property Office dated October 01, 2000; that also, on March 01, 2001, NPP and NPC entered into a Technical License and Assistance Agreement whereby NPC agrees to disclose to NPP technical information relating to the production and use of the Licensed Products provided for in the said Agreement, and to grant to NPP a non-exclusive, non-transferable right, without a right to sub-license, to use and sell the Licensed Products, and to render technical assistance relating to production, including, non-routine testing and evaluation of raw materials, advise and assistance in the preparation of reports of such testing and evaluation; that in consideration therefor, NPP shall pay to NPC royalty fees; that the said License Agreement and its Amendment complies with the provisions of the Intellectual Property Code per Certificate of Compliance No. 5-2001-00039 issued by the Intellectual Property Office dated March 01, 2001. In reply, please be informed that Article 12 of the RP-Japan tax treaty provides, viz : "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 both 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 for information concerning industrial, commercial or scientific experience." "xxx xxx xxx" Based on the afore-cited provisions, 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; 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 the royalties. Such being the case, since NPP is not a BOI-registered enterprise, and the payments it makes to NPC are not for 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 herein royalty payments are subject to the preferential tax rate of twenty five per cent (25%) of the gross amount of royalties pursuant to Article 12(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD-79-02 ) Moreover, the said royalty payments are subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, NPP being the payor in control of the payment shall, before making payments of royalties to NPC, be responsible for withholding and remitting to this Bureau the 10% VAT due thereon by filing a separate VAT return for and on behalf of NPC using BIR Form 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due from NPP if it is a VAT-registered taxpayer. In case NPP is non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as expense, whichever is applicable. In addition, NPP is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of NPC, the first three copies thereof to be given to NPC and the fourth copy to be retained by NPP as its file copy. [ Section 4 & 6, Revenue Regulation No. 4-2002 ] In fine, NPP shall be responsible for the withholding of income tax at the rate of 25% of the gross amount of royalties paid and the value-added tax at the rate of 10% of the contract amount. 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