ITAD Ruling No. 149-00

October 23, 2000 ITAD RULING NO. 149-00 RP-Japan-Art. 12 NIRC-Sec. 28 (B) (4) & Sec. 108 078-97 UN 296-94 Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Mr . George J . Lavadia Principal, Tax and Corporate Services Gentlemen : This refers to your letter dated February 12, 1998 on behalf of your client, Kanepackage Philippines, Inc. (KPI), requesting confirmation of your opinion that rental payments to be made by KPI to Kanepackage Co. Ltd. (KCL) are exempt from Philippine income tax pursuant to Article 7 in relation to Article 5 of the RP-Japan Tax Treaty. It is represented that KCL is a non-resident foreign corporation organized and existing under the laws of Japan; that it is not registered to do business in the Philippines as per certification issued by the Securities and Exchange Commission dated February 10, 1998; and that on January 29, 1996 KCL entered into an Equipment Lease Agreement with KPI, a domestic corporation, for the lease of certain equipment to be used by KPI for its manufacturing operations for which KPI will pay a monthly rental to KCL as stipulated in the Contract of Equipment Lease. 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. cISAHT "(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." (Emphasis supplied) "xxx xxx xxx" Based on the aforequoted provisions, the abovementioned rental payments are covered by the term "royalties," and as such are subject to the preferential rate not exceeding twenty-five percent (25%) of the gross amount of royalties. However, Section 28(B)(4) of the Tax Code of as provides, viz: "SEC. 28. Rates of Income Tax on Foreign Corporations . "xxx xxx xxx "(B) Tax on Nonresident Foreign Corporations . "xxx xxx xxx "(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment . Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7%) of gross rentals or fees ." (Emphasis supplied) In view thereof, this Office hereby rules that the rental payments to be made by Kanepackage Philippines, Inc. to Kanepackage Co., Ltd., are subject to seven and one-half percent (7%) tax rate on gross rentals, the same not having exceeded the 25% rate imposed on the gross amount of royalties under the RP-Japan Tax Treaty, contrary to your opinion that said rental payments are exempt from Philippine income tax pursuant to Article 7 in relation to Art. 5 of the RP-Japan Tax Treaty. (UN 296-94, BIR Ruling No. 078-97) Moreover, the said rental payments to be made by KPI to KCL for the lease of equipment shall be subject to the 10% value-added tax imposed under Section 108 of the Tax Code of 1997, based on the contract price agreed upon by the parties. Your client, KPI, being the licensee shall be responsible for the payment of VAT on such rentals on behalf of KCL by filing a separate VAT declaration/return using BIR Form No. 1600. The said VAT declaration/return can be used by KPI as evidence in claiming input tax credit. (Sec. 4.102-1(b), Revenue Regulations No. 7-95) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group