ITAD Ruling No. 144-04

December 17, 2004 ITAD RULING NO. 144-04 Articles 11 and 12 Philippines-Japan tax treaty BIR Ruling Nos. DA-ITAD 25-04 and 67-04 Nidec Philippines Corporation 136 North Science Avenue Extension Special Economic Zone Laguna Technopark Bian, Laguna Attention: Mr. Yasuo Hamaguchi President Gentlemen : This refers to your letter dated August 26, 2004 requesting confirmation that interest and royalties to be paid by Nidec Philippines Corporation (Nidec Philippines) to Nidec Corporation (Nidec Japan) are both subject to 10 percent income tax pursuant to Articles 11 and 12 of the Philippines-Japan tax treaty. It is represented that Nidec Japan is a nonresident foreign company organized and existing under the laws of Japan with office address at 338 Kuze Tonoshirocho, Minami-ku, Kyoto, Japan; that Nidec Japan is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on August 17, 2004; that Nidec Philippines , on the other hand, is a domestic company organized and existing under the laws of the Philippines with principal office at 136 North Science Avenue Extension, Special Economic Zone, Laguna Technopark, Bian, Laguna, Philippines; that Nidec Philippines has been duly registered as of July 28, 2004 with the Board of Investments, with a pioneer status, as confirmed by the Certificate of Registration No. EP 2004-85 issued by the Board on the same date; that being a registered enterprise, Nidec Philippines is an export producer of spindle motors for hard disk drives of computers, with a capacity to produce 54,373,621 units thereof in a year; that, on June 15, 2004 and on July 16, 2004, for loans received on those dates amounting to 5,000,000 U.S. dollars and 4,000,000 U.S. dollars, respectively, Nidec Philippines issued to Nidec Japan Promissory Notes Nos. 04-01 and 04-02, whereby Nidec Philippines agreed to pay Nidec Japan interest for each loan at the rates of 2.95 percent and 2.85 percent, respectively, at the end of every quarter and for one year. It is further represented that on January 1, 1997, Nidec Philippines and Nidec Japan entered into a Technical Assistance Agreement, whereby Nidec Japan agreed to provide Nidec Philippines technical processes and procedures on the development, manufacturing and marketing of spindle motors, direct current motors, stators, brackets, bracket assembly (BRT + FPC + STA), hub, base and base assembly, and other computer-related hardware; and that, in consideration, Nidec Philippines agreed to pay Nidec Japan at the end of each month, royalties at the rate of 5 percent based on Nidec Philippines net sales of locally manufactured products which made use of the subject know-how. TIcAaH In reply, please be informed that interest and royalties arising in the Philippines and paid to a resident of Japan are subject to preferential tax rates under the relevant provisions of Articles 11 and 12 of the Philippines-Japan tax treaty, to wit: "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 percent 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. "3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the interest 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 interest, shall not exceed 10 per cent of the gross amount of the interest. "xxx xxx xxx" "Articles 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. TCaAHI "xxx xxx xxx" Based on the foregoing, interest arising in the Philippines and paid to a resident of Japan is subject to 10 percent income tax if the same is paid in respect of government securities, bonds or debentures, or if the company paying the interest, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines. In all other cases, the interest is subject to 15 percent income tax. As regard royalties, the same are subject to 10 percent income tax if the company paying the royalties, being a resident of the Philippines, is registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, and to 15 percent income tax if they are paid in respect of the use of or the right to use cinematograph films and films or tapes fork, radio or television broadcasting. In all other cases, the royalties are subject to 25 percent income tax. Accordingly, in view of the fact that Nidec Philippines is a domestic company registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines, as confirmed by Certificate of Registration No. EP 2004-85 issued by the Board of Investments on July 28, 2004, interest and royalties to be paid by Nidec Philippines to Nidec Japan on and after July 28, 2004 are both subject to 10 percent income tax based on the gross amount of the interest and royalties. (BIR Ruling No. DA-ITAD 25-04 dated March 11, 2004). On the other hand, interest and royalties to be paid by Nidec Philippines to Nidec Japan before July 28, 2004 are subject to 15 percent income tax and 25 percent income tax, respectively, as already confirmed by an earlier BIR Ruling No. DA-ITAD 138-02 dated August 6, 2002. Finally, the provision of the subject know-how in the Philippines by Nidec Japan , being ". . . supply of scientific, technical, industrial or commercial knowledge or information," which tabs within the definition of sale or exchange of services , is subject to 10 percent value-added tax (VAT) under Section 108(A)[(3)] of the National Internal Revenue Code of 1997. Accordingly, royalties to be paid by Nidec Philippines to Nidec Japan for the subject know-how are subject to 10 percent VAT. (BIR Ruling No. DA-ITAD 67-04 dated July 9, 2004) With regard to the procedures for withholding and paying the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that the resident company making the payments to a nonresident company, Nidec Philippines , shall be responsible for the withholding of the 10 percent VAT on such payments before remitting them to the nonresident company, Nidec Japan . In remitting to the Bureau of Internal Revenue the VAT withheld on such payments, Nidec Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer; Nidec Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. If a non-VAT-registered taxpayer, Nidec Philippines may include as part of the cost of the services provided to it by Nidec Japan the VAT consequently shifted nor passed on to it and may treat such VAT either as expense or asset , whichever is applicable. In addition, upon Nidec Japan's request, Nidec Philippines is required to issue in quadruplicate the relevant Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the First three copies to be given to Nidec Japan and the fourth copy to be retained by Nidec Philippines as its file copy. TcaAID This ruling is issued on the basis of 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