ITAD Ruling No. 211-02

November 27, 2002 ITAD RULING NO. 211-02 RP-Japan Tax Treaty, Article 11 & 12 BIR Ruling No. DA-ITAD 98-01 BIR Ruling No. DA-ITAD 103-01 Terumo (Philippines) Corporation 124 East Main Avenue, Laguna Technopark Bian, Laguna Attention: Mr. Koji Suzuki Director-Administration and General Affairs Gentlemen : This refers to your tax treaty relief application dated November 12, 2001 requesting for the availment of preferential tax rate of 15% on the interest payments and 10% on the royalty payments of Terumo (Philippines) Corporation (TPC) to Terumo Corporation (TC) pursuant to Articles 11 and 12, respectively, of the RP-Japan tax treaty. It is represented that TC is a non-resident foreign corporation duly organized and existing under the laws of Japan with office address at 44-1, 2-chome, Hatagaya, Shibuya-ku, Tokyo, Japan; that per letter dated January 21, 2002 of Mr. Benito A. Cataran, Director, Company Registration and Monitoring Department of the Securities and Exchange Commission, TC is not licensed to do business in the Philippines through a branch; that TC registered a representative office in the Philippines but which license was cancelled on January 10, 2002; that TPC, a subsidiary of TC, is a corporation organized and existing under Philippine laws with office address at 124 East Main Avenue, Laguna Technopark, Bian, Laguna engaged in the manufacture of medical and similar devices sold on wholesale basis; that on September 16, 1998, TPC and TC entered into a License Agreement whereby TPC was granted a non-transferable exclusive license to manufacture any and all products developed by TC to be manufactured and sold by TPC under the licenses from TC in accordance with the Product Specification and Processes and using Technical Information for such purposes; that on September 22, 2000, TPC and TC entered into a Loan Agreement whereby TC granted TPC a loan in the amount of Three Million US Dollars ($3,000,000.00) to be used as working capital by the latter; that TC shall remit the loaned amount by wire transfer to the bank account designated by TPC in accordance with the following schedule: (1) By the end of September, 2000 US$500,000.00 (2) By the end of October, 2000 1,300,000.00 (3) By the end of January, 2001 1,200,000.00; and that the annual interest rate is one year LIBOR in each currencies plus 0.5% which is reviewed every fiscal year. In reply thereto, 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. "xxx xxx xxx" Based on the aforequoted provisions, royalties paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting are subject to fifteen (15%) per cent of the gross amount of the royalties, ten (10%) per cent if the payor is a Board of Investments (BOI)-registered enterprise and engaged in preferred pioneer area of investment and twenty five (25%) per cent of the gross amount of the royalties in all other cases. Such being the case, since TPC is not a BOI-registered enterprise and the payment made are not in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting, this Office is of the opinion and so holds that the royalty payments of TPC to TC are subject to the 25% rate under Article 12(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. 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 or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The license 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." As regards the interest payments of TPC to TC, Article 11 of the RP-Japan tax treaty provides: "Article 11 "(1) Interest 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 interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed: "(a) 10 per cent of the gross amount of the interest if the interest is paid in respect of Government securities, or bonds or debentures; "(b) 15 per cent of the gross amount of the interest in all other cases. "xxx xxx xxx "(5) The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. "xxx xxx xxx" Based on the aforequoted provisions, interest payments in respect of Government securities, or bonds or debentures will be taxed at a preferential rate of ten (10%) per cent of the gross amount of interest and fifteen (15%) per cent of the gross amount of the interest in all other cases. Such being the case, since the interest payments to be remitted by TPC to TC relative to the loan are not in respect of government securities, or bonds or debentures, then such interest payments shall be subject to Philippine withholding income tax at the preferential tax rate of 15% of the gross amount of interest, pursuant to Article 11(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. ITAD-98-01 dated October 23, 2001 ) Moreover, the Loan Agreement entered into by and between TPC and TC is subject to the documentary stamp tax imposed under Section 180 of the National Internal Revenue Code of 1997. 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