ITAD Ruling No. 155-05

December 12, 2005 ITAD RULING NO. 155-05 Article 12, Philippines-Japan tax treaty Sections 108 (A) (3) and 109 (q) National Internal Revenue Code of 1997 BIR Ruling Nos. DA-ITAD 139-04 and 112-05 Rohm Apollo Semiconductor Philippines, Inc . People's Technology Complex Special Economic Zone Maduya, Carmona, Cavite Attention: Ms. Merlita M. Macaspac Deputy Department Manager Gentlemen : This refers to your letter dated September 24, 2004 requesting our opinion on the tax treatment of royalty to be paid by Rohm Apollo Semiconductor Philippines, Inc. (Rohm Apollo Philippines) to Rohm Apollo Company, Ltd. (Rohm Apollo Japan) pursuant to a Technical Assistance Agreement. It is represented that Rohm Apollo Japan is a foreign corporation organized and existing under the laws of Japan, with head office at 1164-2 Ooaza Hiyoshi, Hirokawa-cho, Yame-gun, Fukuoka Prefecture, Japan, as confirmed by its Complete Company Profile dated December 18, 2002 issued by the Fukuoka Legal Affairs Bureau; that Rohm Apollo Japan's business activities consist in the manufacturing and sale of electrical and electronic parts and the practice of all kinds of incidental works and businesses related thereto; that Rohm Apollo Japan is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines as confirmed by the Certificate of Non-Registration of Corporation/Partnership dated August 23, 2004 issued by the Securities and Exchange Commission; that, on the other hand, Rohm Apollo Philippines is a corporation organized and existing under the laws of the Philippines, with office address at People's Technology Complex Special Economic Zone, Maduya, Carmona, Cavite, Philippines, as confirmed by its Registration Agreement with the Philippine Economic Zone Authority (PEZA) dated September 18, 2000, who issued Rohm Apollo Philippines its Certificate of Registration No. 00-077 dated September 18, 2000; that Rohm Apollo Philippines ' business activity as an Ecozone Export Enterprise is the manufacturer of semiconductor products, particularly microchip transistors and tantalium capacitors; that on April 1, 2004, Rohm Apollo Japan and Rohm Apollo Philippines entered into a Technical Assistance Agreement (Agreement) whereby Rohm Apollo Japan agreed to provide Rohm Apollo Philippines technical assistance in the following categories: 1. Technical assistance in the manufacture of products 2. Technical assistance in the maintenance of production machinery 3. Technical assistance in management administration 4. Transfer of technical know-how, and 5. Other activities relating to any of the foregoing items that in consideration, Rohm Apollo Philippines shall pay Rohm Apollo Japan a technical assistance fee (and referred to as 'royalty' by Rohm Apollo Philippines ) equivalent to 7% of the processing prime cost of transistors from Rohm Apollo Philippines to Rohm Apollo Japan ; that the Agreement is effective from April 1, 2004, with an initial term of one (1) year and renewable automatically for successive one (1) year periods; and that the Agreement complies with Sections 87 and 88, Chapter IX, Part II of the Intellectual Property Code (Republic Act No. 8293) on Voluntary Licensing, as confirmed by its Certificate of Compliance No. 5-2004-00093 dated September 15, 2004 issued by the Intellectual Property Office. cHITCS In reply, please be informed that as regards income tax, the pertinent paragraphs of Article 12 of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Japan tax treaty) provide as follows: "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 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 The nature of the payments to be made by Rohm Apollo Philippines to Rohm Apollo Japan for the provision of information relating to the manufacture of products, maintenance of production machinery, management administration technical know-how, and other related activities, is considered "payments as a consideration for information concerning industrial, commercial or scientific experience" and as such are royalties under paragraph 3 of Article 12. Being in the nature of royalties, such payments are subject to a tax rate of 25 percent, based on the gross amount thereof under paragraph 2(b) of Article 12. (BIR Ruling No. DA-ITAD 139-04 dated November 30, 2004) The payments cannot be subject to the lower tax rate of 15 percent under paragraph 2(a) because they are not in the nature of payments for the use of or the right to use of cinematograph films and films or tapes for radio or television broadcasting, nor to the lowest of 10 percent under paragraph 3 because Rohm Apollo Philippines ,the company making the payments, is a company who is not registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines. 06taxcdtai As regards value-added tax (VAT),the provision by Rohm Apollo Japan to Rohm Apollo Philippines of information relating to the manufacture of products, maintenance of production machinery, management administration technical know-how, and other related activities, is generally subject to ten percent (10%) VAT, under Section 108(A)(3) of National Internal Revenue Code of 1997 (Tax Code): "Section 108. Value-Added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties The phrase 'sale or exchange of services 'shall likewise include: xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information ;(emphasis added) ACaDTH xxx xxx xxx However, Section 109(q) of the Tax Code exempts from VAT transactions which are exempt under international agreements or under special laws: "SEC. 109. Exempt Transactions . The following shall be exempt from the value-added tax: xxx xxx xxx (q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree Nos. 66, 529 and 1590; xxx xxx xxx" 2 Concerning special laws relevant to Rohm Apollo Philippines and other PEZA-registered enterprises, Section 24 of Republic Act No. 7916 (An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes) and Section 1, Rule XIV (Incentives to ECOZONE Developers/Operators) of the Rules and Regulations to Implement this Act are worth mentioning: "Section 24. Exemption from Taxes Under the National Internal Revenue Code. Any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent of the gross income earned by all business and enterprises within the ECOZONE shall be remitted to the national government. . ." "Section 1. ECOZONE Developers/Operators. ECOZONE Developers/Operators shall be entitled to the following incentives: A. Exemption from National and Local Taxes and Licenses. An ECOZONE Developer/Operator shall to the extent of its construction and operation, be exempt from payment of all national internal revenue taxes and local government impost fees, licenses or taxes, including but not limited to the following: 1. Internal revenue taxes such as gross receipts tax, value-added tax, ad valorem and excise taxes; 2. Franchise, common carrier or value added taxes and other percentage taxes on public and service utilities and enterprises. xxx xxx xxx" Accordingly, since VAT is an indirect tax and as such, the amount of tax may be shifted or passed on to Rohm Apollo Philippines (Section 105, Tax Code), Rohm Apollo Philippines , by reason that it is exempt from national internal revenue taxes like VAT under Section 24 of Republic Act No. 7916, cannot be obliged by Rohm Apollo Japan to shoulder the payment of VAT on the provision of the subject information. This is further supported by PEZA Certificate No. 2004-097/2005-084 dated December 20, 2004 issued to Rohm Apollo Philippines which states that suppliers of goods, properties, and services to Rohm Apollo Philippines ,being a PEZA-registered enterprise, are entitled to zero percent (0%) VAT for sales made to Rohm Apollo Philippines and by VAT Ruling No. 100-99 dated September 16, 1999, the dispositive portion of which provides: "In the case of payment for royalties to a non-resident owner, the responsibility for withholding the VAT and paying the same rests on the payor. However, since PEZA-registered export enterprise may not be passed on with nor claim input VAT, then payment of royalties to a non-resident lessor, . . . , should be as it is hereby confirmed to be exempt from VAT." (BIR Ruling No. DA-ITAD 112-05 dated September 30, 2005) 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. IADaSE Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service Footnotes 1. Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 151, 236, 237 And 288 Of The National Internal Revenue Code Of 1997, As Amended, And For Other Purposes), which was signed into law on May 24, 2005, amends Section 108(A)(3), thus: "SEC. 106. Value-added Tax on Sale of Goods or Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, that the President, upon the recommendation of the Secretary of finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%),after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds one and one-half percent (1 1/2%);or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2 %). ...The phrase 'sale or exchange of services' shall likewise include: xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" 2. Republic Act No. 9337 amends Section 109(q), thus: "SEC. 109. Exempt Transactions. The following shall be exempt from the value-added tax: xxx xxx xxx (K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under Presidential Decree No. 529; xxx xxx xxx"