ITAD Ruling No. 210-02

November 27, 2002 ITAD RULING NO. 210-02 RP-Singapore Tax Treaty, Article 12 BIR Ruling No. DA-ITAD-99-02 Sohbi Kohgie (Phils.) Inc. Special Economic Zone Lima Technology Center Lipa City, Batangas Attention: Merlita C. Navalta Accounting Manager M a d a m : This refers to your letter dated March 6, 2002 requesting for a ruling that the royalty payments of Sohbi Kohgei (Phils.), Inc. (Sohbi) to Amtek Engineering Ltd. (Amtek) are subject to the preferential withholding tax rate of 25 per cent (25%) pursuant to the RP-Singapore tax treaty. It is represented that Amtek is a non-resident foreign corporation duly organized and existing under and by virtue of the laws of Singapore with principal office at 1 Kian Tech Drive Singapore 628818; 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 certification issued by the Securities and Exchange Commission dated June 28, 2002; that Sohbi is a corporation duly organized and existing under Philippine laws and duly registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 99-050 issued on August 12, 1999; that Sohbi is principally engaged in the business of manufacturing metal parts and components using the precision metal stamping technology and has manufacturing facilities in the Philippines; that on August 7, 2001, Sohbi entered into a Contract Manufacturing Agreement with Amtek, which is also principally engaged in the business of manufacturing metal parts and components using the precision metal stamping technology; that under the Agreement, Amtek wishes to engage the services of Sohbi to produce metal parts and components in the Philippines to meet the orders of such products for certain customer of Amtek as may be requested from time to time; and in consideration of the Contract Manufacturing Agreement, Sohbi shall pay Amtek royalty as stated in Schedule 1 & 2 of the agreement. In reply, please be informed that Article 12 of the RP-Singapore tax treaty provides, viz : "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 State. "(2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: "(a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; "(b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (relief from Income Tax) Act of Singapore, the royalties shall be exempt; "(c) in all other case, 25 per cent of the gross amount of the royalties. "(3) 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 cinematographic films or tapes for television or 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 aforequoted provisions, it will be noted that in the case of the Philippines, royalties will be taxed at the preferential rate of fifteen per cent (15%) if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred areas of activities. Royalties paid in respect of cinematographic films or tapes for television or broadcasting are also subject to 15%; and in all other cases, royalty payments will be taxed at twenty-five per cent (25%) of the gross amount of the royalties. Since Sohbi is not a BOI-registered enterprise engaged in preferred areas of activities and considering that the royalty payment is not made in respect of cinematographic films or tapes for television or broadcasting, this Office is of the opinion and so holds that the royalty payments by Sohbi to Amtek are subject to the preferential withholding tax rate of 25% of the gross amount of royalties pursuant to Article 12(2)(c) of the RP-Singapore tax treaty. ( BIR Ruling No. DA-ITAD-99-02 dated May 22, 2002 ). 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service