ITAD Ruling No. 168-00

October 30, 2000 ITAD RULING NO. 168-00 RP- Japan Article 12 BIR Ruling 7-86; ITAD Ruling 21-00 Joaquin Cunanan & Co. 14 Floor, Multinational Bancorporation Center 6805 Ayala Avenue, Makati City Attention: Mr . George J . Lavadia Principal, Tax & Corporate Services Department Gentlemen : This refers to your letter dated June 15, 1998 requesting confirmation that royalty payments made by SONY PHILIPPINES, INC. (SPI) to your client, SONY CORPORATION (SC) are subject to a preferential tax rate of 25% pursuant to the RP-Japan Tax Treaty. It is represented that SC is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office at 7-35, Kitashinagawa 6-chome, Shinagawa-ku, Tokyo, Japan; that SC is not registered as a corporation or a partnership licensed to do business herein the Philippines as per certification dated April 13, 2000 issued by the Securities and Exchange Commission; that SPI is a domestic corporation with office address at Solid House, 2285 Lumbang Street Corner Pasong Tamo Extension, Makati City; that on October 1, 1997, SC and SPI entered into a Manufacturing License Agreement duly registered with the Technology Transfer Agreement Registry of the Bureau of Patents, Trademarks and Technology Transfer with Certificate of Registration No. 2099, valid for two (2) years from October 1, 1997 to September 30, 1999; that pursuant to the Manufacturing License Agreement, SC granted SPI a non-exclusive license to manufacture and sell, lease or otherwise dispose various electronic products bearing the trademark of "Sony"; and that in consideration of the said agreement, SPI shall pay SC a royalty of 3% of its net sales payable in Japanese Yen or US Dollars. 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) . . . "(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, royalty payments by a Philippine corporation to a resident of Japan may be taxed at the rate of 25 per cent of the gross amount of royalty. In view thereof, this Office confirms your opinion that royalty payments by SPI to SC are subject to 25 per cent tax rate pursuant to the RP-Japan Tax Treaty. (BIR Ruling 7-86; ITAD Ruling 21-00) Finally, the said royalties shall be subject to 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code of 1997 and that SPI shall, before making payments of royalties to SC, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return for and on behalf of CS using BIR Form 1600. The duly validated VAT declaration/return is sufficient evidence for SPI in claiming input tax credit (Sec. 4.110-3(b) of the Revenue Regulation No. 7-95). HAICTD This ruling is being issued based on the foregoing representations. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group