ITAD Ruling No. 163-02

September 23, 2002 ITAD RULING NO. 163-02 Art. 12 of RP-Japan RR 7-95 BIR Ruling No. ITAD 67-00 Shinryo (Philippines) Company, Inc. Corporate Plaza Bldg. 845 A. Arnaiz Avenue Makati City Attention: Mr. Koichi Kikawada President Gentlemen : This refers to your application for relief from double taxation dated April 11, 2002, requesting for 25% preferential tax rate on the royalty payments of your company, Shinryo (Philippines) Company, Inc. (Shinryo-Phils) to Shinryo Corporation (Shinryo-Japan), pursuant to Article 12 of the RP-Japan tax treaty. It is represented that Shinryo-Japan is a non-resident foreign corporation organized and existing under the laws of Japan with business address at #4 Yotsuya, 2 Chome Shinjuku-Ku, Tokyo 160 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 July 2, 2002; that Shinryo-Phils is a domestic corporation organized and existing under Philippine laws with business address at One Corporate Plaza 845 A. Arnaiz Avenue, Makati City; that Shinryo-Phils and Shinryo-Japan entered into a Royalty and Technical Assistance Agreement on January 2, 1992 which was subsequently amended and renewed on October 1, 1993; that under the Agreement, Shinryo-Phils shall pay Shinryo-Japan royalty in the amount of 3.5% of the net sales, which is defined under the said Agreement as the invoice value based on contract price of projects being undertaken by Shinryo-Phils less: (a) commission, if any, and (b) taxes, excise or other government charges; and that the validity of the amended and renewed agreement shall be for ten (10) years beginning on October 1, 1993 and ending on September 30, 2003. In reply, please be informed that Article 12 of the RP-Japan tax treaty provides as follows, 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 the 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. "xxx xxx xxx" "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 the literary, artistic or scientific work including cinematograph films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use, or the right to use industrial, commercial, or scientific equipment, or for information concerning industrial, commercial scientific experience." The tax treaty defines "royalties" to include "payments of any kind received as a consideration for information concerning industrial, commercial or scientific experience." According to the commentaries of the ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD) Committee on Fiscal Affairs on the Model Tax Convention [par. 11, Commentary on Article 12 (Royalties), 1998, p. 151), such information alludes to the concept of "know-how". The definition of know-how, which has been adopted by the said Committee, is "all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique." In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. As thus defined by the Technical and Assistance Agreement by and between Shinryo-Japan and Shinryo-Phils., the information to be imparted by Shinryo-Japan falls under the purview of know-how. Such being the case, this Office hereby confirms that the fees arising in the Philippines and payable to Shinryo-Japan by Shinryo-Phils under the subject Agreement are subject to the preferential royalty tax rate of 25% pursuant to Article 12(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. ITAD 67-00 dated April 7, 2000 ) Moreover, the said royalty payments by Shinryo-Phils to Shinryo-Japan are subject to ten per cent (10%) value-added tax (VAT) pursuant to Section 108(A) of the Tax Code of 1997. Accordingly, Shinryo-Phils being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of Shinryo-Japan by filing a separate VAT return for and on behalf of Shinryo-Japan using BIR Form No. 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 Shinryo-Phils. In addition, Shinryo-Phils is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form 2307) in quadruplicate upon request of Shinryo-Japan, the first three copies thereof to be given to Shinryo-Japan and the fourth copy to be retained by Shinryo-Phils as its file copy. ( Section 4 and 6, Revenue Regulations 4-2002 ) In fine, Shinryo-Phils shall be responsible for the withholding of income tax at the rate of 25% of the gross amount of royalties and the value-added tax at the rate of 10% of the contract amount. This ruling is issued based on the foregoing 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 the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service