ITAD Ruling No. 145-03

September 26, 2003 ITAD RULING NO. 145-03 Article 12 (3) & (4), RP-Japan BIR Ruling Nos. DA-ITAD-111-02; DA-666-A-99 Synertronix Inc . IONICS Bldg. 2296 Pasong Tamo Ext., Makati City Attention: Mr. Bonifacio R. Domingo Vice President for Finance Gentlemen : This refers to your letter dated August 28, 2000, Attention: Law Division, for confirmation that the applicable tax rate to be withheld on your royalty payments to IBM-Japan Ltd. (IBM), is ten per cent (10%) of the gross amount of the royalties pursuant to Article 12(3) & (4) of the RP-Japan tax treaty. It is represented that IBM is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at 3-2-12 Roppongi, Minato-ku, Tokyo, 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 dated December 15, 2000 issued by the Securities and Exchange Commission (SEC); that Synertronix, Inc. (SI) is a corporation duly organized and existing under the laws of the Philippines; that SI is registered with the Board of Investments (BOI) on a preferred pioneer status as a semi-conductor domestic corporation under Certificate of Registration No. EP 94-526 issued on December 29, 1994 with office address at Synertronix Bldg., Barangay Batino, Mayapa, Calamba, Laguna; that SI is a wholly-owned subsidiary of Ionics Circuit, Inc. (ICI); that on January 16, 1996, SI, through its mother company, ICI, entered into an Agreement for Consultancy Services with IBM for the following: 1) Technical assistance to set up a PCB plant for 6 layers with 5-LPC capability; 2) On-site training at IBM Yasu for its project task members for a maximum of three (3) months and twenty (20) persons in total before the process debugging, and; 3) Provide monthly project status report which includes a) progress status b) concern suggestion and c) next monthly activity plan. It is further represented that since SI is incurring substantial losses, the Board of Directors agreed that the ICI group will provide financial assistance to SI for operational expenditures or major asset acquisitions. Funding is made through interest-free stockholders' advances, but if the funds are raised by ICI through bank borrowing the advances are interest-bearing to cover the interest on the bank borrowing. The pertinent board resolutions and the cash vouchers issued by the lenders and whose receipt is acknowledged by the borrowers are the bases in recording the transactions in the books of both the lenders and the borrowers. No loan agreements, promissory notes, and debit or credit memos or intercompany loan memos are issued in these transactions by the lenders and borrowers. In reply, please be informed that Article 12 of the RP-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. "(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" Based on the foregoing, 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 SI is a BOI-registered enterprise and engaged in a preferred pioneer status, the payments made by SI to IBM shall be subject to the preferential tax rate of ten per cent (10%) based on the gross amount of royalties. [BIR Ruling No. DA-ITAD-111-02 dated May 31, 2002] Moreover, the said royalty payments shall be subject to the 10% value-added tax (VAT) under Section 108(A)(1) and (3) of the Tax Code of 1997. Section 4.102-1(b) of Revenue Regulation No. 7-95 provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600 Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee. Accordingly, Synertronix, Inc. shall, before making payment of royalties to IBM-Japan Ltd., withhold and remit to this Bureau the value-added tax at the rate of 10% of the contract amount and the income tax at the rate of 10% of the gross amount of royalties. Finally, we likewise confirm your opinion that since the intercompany advances are not covered by loan agreements, promissory notes, debt and credit memos nor by intercompany loan memos, and since the only documents relating to the intercompany advances are the board resolutions of the lenders and the cash vouchers issued by the lenders, the same are not subject to documentary stamp tax pursuant to Section 180 of the Tax Code of 1997. (BIR Ruling No. DA-666-A-99 dated December 3, 1999) 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group