ITAD Ruling No. 185-02

October 21, 2002 ITAD RULING NO. 185-02 RP-Japan Tax Treaty, Article 12 BIR Ruling No. DA-ITAD-103-01 Fuji Plastic Industry Phils., Inc. N2845 Jose Abad Santos Avenue Clark Special Economic Zone Pampanga Attention: Kunio Kurosawa Executive Vice President Gentlemen : This refers to your letter dated June 18, 2002 for the availment of preferential tax rate on royalty payments of Fuji Plastic Industry Phils., Inc. (Fuji-Phils.) to Fuji Plastic Industry Co. Ltd. (Fuji-Japan) pursuant to Article 12 of the RP-Japan tax treaty. It is represented that Fuji-Japan is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at 229 Higashi Asakawa Cho, Hachioji City, Tokyo 193, 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 as evidenced by a certification issued by the Securities and Exchange Commission dated June 25, 2002; that Fuji-Phils. is a domestic corporation with principal office address at N2845 Jose Abad Santos Avenue, Clark Special Economic Zone, Clarkfield, Pampanga; that Fuji-Phils. is a duly registered Clark Special Economic Zone (CSEZ) Locator and has committed to engage in manufacture, assembly, and sale of plastic molding materials for export per Certificate of Registration No. 2000-26; that on May 29, 2001, Fuji-Japan and Fuji-Phils. entered into a Royalty Agreement; that for and in consideration of the use of trade mark, technical drawings, specifications, know-how and other information necessary for the manufacture of products in the Philippines, Fuji-Phils. agrees to pay Fuji-Japan a royalty fee at the rate of three to eight percent (3% to 8%) of the ex-factory prices of the total sales of all products to be sold to the market by Fuji-Phils., less excise tax and other similar taxes. In reply, please be informed that Article 12 of the RP-Japan tax treaty states that: "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. DTEAHI "xxx xxx xxx" Based on the abovequoted provision, since Fuji-Phils. is not a BOI-registered enterprise and the payments made by Fuji-Phils. to Fuji-Japan 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 royalty payments of Fuji-Phils. to Fuji-Japan are subject to the 25% rate under Article 12(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD 103-01 dated October 29, 2001 ) Moreover, the said royalty payments shall be subject to the 10% value-added tax (VAT) under Sec. 108(A)(1) and (3) of the Tax Code of 1997. Section 4.102-1(b) of the Revenue Regulation No. 7-95 provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use of lease or properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner by filing a separate VAT declaration/return (BIR Form No. 1600-Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld) for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed or discovered 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