ITAD Ruling No. 178-00

November 14, 2000 ITAD RULING NO. 178-00 RP-JAPAN Art. 12 ITAD 83-00 TS Tech Trim Philippines, Inc. 102 Technology Avenue, Laguna Technopark, SEPZ, Bian, Laguna Attention: Mr . George S . Agustin Finance Manager Gentlemen : This refers to your letter dated July 05, 2000 for confirmation that the applicable tax rate to be withheld on your royalty payments to your mother company, TS TECH CO., LTD., JAPAN (TTJ), is twenty-five percent (25%) of the gross amount of the royalties as set forth under Article 12(2)(b) of the RP-Japan Tax Treaty. It is represented that TTJ (formerly Tokyo Seat Co., Ltd.) is a non-resident foreign corporation duly organized and existing under the laws of Japan; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per certification dated August 23, 2000 issued by the Securities and Exchange Commission (SEC); that TS TECH TRIM PHILIPPINES, INC., (TTTP) (formerly Tokyo Seat Philippines, Inc.), on the other hand, is a Philippine Economic Zone Authority (PEZA)-registered 100% Japanese owned corporation operating in the Philippines primarily engaged in the manufacture, sale, and export of car seats, trim covers and other goods including the export of Philippine indigenous goods and materials; that on February 01, 1996, TTTP, desirous to obtain and receive a license and technical assistance for the manufacture and sale of certain seats and interior parts for automobiles, entered into a License and Technical Assistance Agreement with TTJ whereby TTJ will grant to TTTP an indivisible and non-transferable non-exclusive right and license to manufacture, assemble, and sell the Products, and manufacture, assemble and install Manufacturing Facilities within the Territory under the Intellectual Property Rights and by using the Know-How; that in consideration for the grant, TTTP shall pay to TTJ royalties corresponding to three one-hundredths (3%) times the cost specified in the Agreement, for each Licensed Product manufactured and sold by TTJ during the same royalty period. In reply, please be informed that Article 12 of the RP-Japan Tax Treaty provides 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; SAEHaC (b) 25 per cent of the gross amount of the royalties in all other cases . (Emphasis supplied) "(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, trademark, 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, the royalty payments will be taxed at the preferential tax rate of ten per cent (10%) if the payor is a Board of Investments (BOI)-registered enterprise, fifteen per cent (15%) if the payments are in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, and in all other cases, twenty-five per cent (25 %) of the gross amount of the royalties. Such being the case, since TTTP is not a BOI-registered enterprise, and the payments made by TTTP to TTJ are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, the herein payments qualifies as royalty payments under Article 12(2)(b) of the RP-Japan Tax Treaty. CSIHDA Hence, the royalty payments made by TS TECH TRIM PHILIPPINES, INC. to TS TECH CO., LTD., JAPAN shall be subject to the preferential tax rate of twenty five per cent (25 %) based on the gross amount of royalties. This ruling is being issued on the basis of the 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, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group