ITAD Ruling No. 173-02

October 3, 2002 ITAD RULING NO. 173-02 Art. 12, RP-Japan BIR Ruling No. ITAD-128-02 Precision Springs Cebu, Inc. 5th St. PEZA-Mactan, Pusok Lapu-Lapu City, Mactan Island, Cebu Attention: Ms. Edna L. Flores Accounting Manager Gentlemen : This refers to your application for tax treaty relief dated July 18, 2002, requesting for a preferential rate of 25 per cent on the royalty payments of Precision Springs Cebu, Inc. (Precision-Cebu) to Mitsubishi Steel Manufacturing Co., Ltd. (Mitsubishi-Japan) pursuant to Article 12 of the RP-Japan tax treaty. It is represented that Mitsubishi-Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal address at 2-22 Harumi 3-Chome Chuo-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 Certificate of Non-Registration dated March 30, 2001 issued by the Securities and Exchange Commission; that Precision-Cebu is a domestic corporation duly organized and existing under the laws of the Philippines with principal address at 5th Street, PEZA-Mactan, Lapu-Lapu City, Cebu; that Precision-Cebu is a PEZA-registered corporation with Certificate of Registration No. 94-70 issued on September 19, 1994; that on April 1, 2002, Precision-Cebu entered into a Technical Assistance Agreement with Mitsubishi-Japan registered with the Intellectual Property Office under Certificate of Compliance No. 5-2002-00099 issued on July 9, 2002; that under the said Agreement, Mitsubishi-Japan shall provide Precision-Manila non-exclusive license to use its know-how and manufacture the licensed products within the manufacture territory and that Precision-Cebu may sublicense third parties to manufacture the licensed products within the manufacture territory upon prior written approval of Mitsubishi-Japan; that Mitsubishi-Japan shall also provide technical assistance in the full and satisfactory implementation of the Agreement; that in consideration of the license granted and the technical assistance, Precision-Cebu shall pay Mitsubishi-Japan a running royalty in the amount of 4.0% of Net Sales Price and that the payment or the aforesaid running royalty shall not include the licensed products supplied by Precision-Cebu to Mitsubishi-Japan as well to its affiliated companies. 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. "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 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. ATESCc "xxx xxx xxx" Based on the aforequoted provisions, royalties arising in the Philippines and paid to a resident of Japan shall also be taxable in the Philippines. Thus, this Office is of the opinion and so holds that the royalty payments of Precision-Cebu to Mitsubishi-Japan, being the beneficial owner of the royalties, shall be subject to a preferential tax rate of 25 per cent pursuant to Article 12 of the RP-Japan tax treaty. (BIR Ruling No. ITAD 128-02 dated August 2, 2002) This ruling is issued based on 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service