ITAD Ruling No. 194-03

December 23, 2003 ITAD RULING NO. 194-03 Article 12, Philippines-Japan tax treaty BIR Ruling No. ITAD 142-03 Sycip Gorres Velayo & Co. 6th Floor, Ayala Life FGU Center Mindanao Avenue corner Biliran Road Cebu Business Park, Cebu City 6000 Cebu Attention: Atty. Lauris dela Pea Tax Services Gentlemen : This refers to your letter dated July 24, 2003 requesting confirmation that payments for proprietary and technical information on the manufacture of steering wheels and knobs for automobiles provided by Autoliv-Japan to Autoliv-Philippines , and technical assistance furnished related thereto, are royalties subject to 25 percent income tax under Article 12 of the Philippines-Japan tax treaty. It is represented that Autoliv Izumi, Ltd. (Autoliv-Japan) is a foreign company engaged primarily in the manufacture and sale of automobile parts; that Autoliv-Japan is organized and existing under the laws of Japan, with principal office and factory at 704-1 Kameichi Atsugi, Kanagawa 243-0801, Japan; that Autoliv-Japan is not registered as a corporation or as a partnership and is not licensed to engage in trade or business in the Philippines as confirmed by a Certificate of Non-Registration issued by the Securities and Exchange Commission on April 29, 2003; that Autoliv Izumi Philippines, Inc. (Autoliv-Philippines) , on the other hand, is a company organized and existing under the laws of the Philippines, with principal office and factory at 3rd Street, Mactan Economic Zone, Lapu-Lapu City, 6015, Cebu, Philippines; that, on May 27, 2003, Autoliv-Japan and Autoliv-Philippines entered into a Technical Assistance Agreement, where Autoliv-Japan shall provide Autoliv-Philippines proprietary and technical information on the manufacture of steering wheels and knobs for automobiles (the products ), and shall furnish Autoliv-Philippines technical assistance on production engineering and quality control of the Products; that Autoliv-Japan shall furnish technical assistance at Autoliv-Philippines' factory in Cebu and at its own factory in Kameichi Atsugi, Japan; that Autoliv-Japan personnel will visit Autoliv-Philippines' factory to train Autoliv-Philippines employees there on the manufacture of the products , and that Autoliv-Philippines employees, on the other hand, will visit Autoliv-Japan's factory to continue to receive training from Autoliv-Japan personnel there on the manufacture of the products and on information technology and product design related thereto; that as overall consideration, Autoliv-Philippines shall remit to Autoliv-Japan , in U.S. dollars and within 30 days after the closing date of each month, royalty payments equivalent to 5 percent of Autoliv-Philippines' net sales of the products . ACIDTE In reply, please be informed that payments for the proprietary and technical information on the manufacture of the products provided by Autoliv-Japan to Autoliv-Philippines are payments for the use of or the right to use of information concerning industrial, commercial or scientific experience or know-how , and as such are royalties within the definition of the term in paragraph 4, Article 12 of the Philippines-Japan tax treaty: "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 ."(emphasis supplied) Payments for know-how as royalties arising in the Philippines and made to a resident of Japan are taxable under paragraph 2, Article 12 of the Philippines-Japan tax treaty: "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" Under the abovequoted paragraph 2, royalties arising in the Philippines and paid to a resident of Japan who is the beneficial owner of the royalties are subject to 15 percent, if they are paid in respect of the use or the right to use of cinematograph films and films or tapes for radio or television broadcasting, or 25 percent in all other cases. Accordingly, payments for the proprietary and technical information on the manufacture of the products provided by Autoliv-Japan to Autoliv-Philippines, being payments for know-how and not for cinematograph films and films or tapes for radio or television broadcasting, are subject to 25 percent income tax of the gross amount thereof. (BIR Ruling No. ITAD 142-03 dated September 23, 2003) On the other hand, payments for technical assistance on production engineering and quality control of the products furnished by Autoliv-Japan to Autoliv-Philippines , being merely of an ancillary character in relation to the subject technical information provided by Autoliv-Japan to Autoliv-Philippines , are also treated as royalties subject to 25 percent income tax of the gross amount thereof. (BIR Ruling No. ITAD 142-03 dated September 23, 2003) Aside from income tax, payments for the said know-how and technical assistance are also subject to 10 percent value-added tax (VAT), under Sections 108(A), (3) and (4) of the National Internal Revenue Code; the former being payments for the supply of scientific, technical, industrial or commercial knowledge or information , and the latter being payments for the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of any such knowledge or information . (BIR Ruling No. ITAD 142-03 dated September 23, 2003) As regards the procedures for withholding and paying the VAT on royalty payments made by Autoliv-Philippines to Autoliv-Japan , Sections 4 and 6 of Revenue Regulations 4-2000, Section 3 of Revenue Regulations 8-02, and Section 7 of Revenue Regulations 14-2002 altogether state that the resident person making the payments, Autoliv-Philippines , shall be responsible for the withholding of the 10 percent VAT on such payments before remitting them to Autoliv-Japan . In remitting to the Bureau the VAT withheld on such payments, Autoliv-Philippines shall use BIR Form 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, Autoliv-Philippines may use as documentary substantiation for its claim of input VAT the duly filed BIR Form 1600 and the proof of payment accompanying it. If not a VAT-registered taxpayer, Autoliv-Philippines may include as part of the cost of the said know-how and technical assistance, the VAT consequently shifted or passed on to it by Autoliv-Japan and may treat such VAT either as expense or asset , whichever is applicable. In addition, upon Autoliv-Japan's request, Autoliv-Philippines is required to issue in quadruplicate the relevant Certificate of Creditable Tax Withheld at Source (BIR Form 2307), the first, second and third copies to be kept by it and the fourth copy by Autoliv-Japan . IEHSDA Finally, as regards remuneration paid to Autoliv-Japan personnel who will furnish the subject technical assistance at Autoliv-Philippines' factory, Article 15 of the Philippines-Japan tax treaty provides: 1. Subject to the provisions of Articles 16, 18, 19, 20 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned Contracting State if: a) the recipient is present in that other Contracting State for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned, and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State, and c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in that other Contracting State. xxx xxx xxx" Under the abovequoted paragraph 2, such remuneration shall be exempt from Philippine income tax if the following conditions concur: (a) Autoliv-Japan personnel are present in the Philippines for an aggregate period not exceeding 183 days in the calendar year concerned; (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the Philippines; and (c) the remuneration is not borne by a permanent establishment which the employer has in the Philippines. Otherwise, such remuneration shall be subject to Philippine income tax. This ruling is issued on the basis of 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. IDTSEH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service