ITAD Ruling No. 222-02

December 27, 2002 ITAD RULING NO. 222-02 RP-Japan, Section 12 BIR Ruling No. DA-ITAD-103-02 Bernaldo Mirador Law Offices U-1810-11 Cityland Condominium 10-Tower I 6815 Ayala Avenue North 1200 Makati City Attention: Rosario S. Bernaldo Managing Partner Gentlemen : This refers to your letter dated July 26 and August 28, 2002 requesting confirmation of your opinion that the royalty payments by your client, Tottori Sanyo Electric (Philippines) Corporation (TSPC) to Tottori Sanyo Electric Co., Ltd. (TORISAN) are subject to the preferential tax rate of twenty-five percent (25%) pursuant to the RP-Japan tax treaty. It is represented that TORISAN is a non-resident foreign corporation duly organized and existing under the laws of Japan with principal office address at 201 3-chome Minami-Yoshikata, Tottori-shi, Tottori-ken 680-8634, 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 per Certificate of Non-Registration issued by the Securities and Exchange Commission dated July 25, 2002; that TSPC is a domestic corporation duly organized and existing under the laws of the Philippines and a Philippine Economic Zone Authority (PEZA) registered enterprise with principal office at Gateway Business Park, Brgy. Jalavera, General Trias, Cavite; that on June 1, 2002, a Technical Assistance Agreement was executed by TORISAN and TSPC, whereby the former grants and will provide TSPC a non-exclusive right and license, without right to sublicense others, to use its patents, know-how and technical information with respect to the manufacture and/or assembly in the Philippines of telephone set bearing the trademark "SANYO" and any other trademark designated by TORISAN; and that in consideration for such grant, TSPC shall pay to TORISAN a royalty of three percent (3%) of the selling price of all products manufactured and/or assembled and sold or otherwise disposed off by TSPC. In reply, please be informed that Article 12(2)(b) 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; "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. SaHTCE "(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. "(5) The provisions of paragraphs (1), (2) and (3) shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. "xxx xxx xxx" Based on the aforequoted provisions, the royalty payments will be taxed at the preferential tax rate not exceeding 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 royalties. This, however, does not apply if the recipient of the royalty, being a resident of Japan, carries on business in the Philippines in which the royalty arises through a permanent establishment (PE) situated therein. Such being the case, and since TSPC is not a BOI-registered enterprise, and that the payments made by TSPC to TORISAN 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 royalty payments are subject to tax at the rate of twenty-five percent (25%) per cent of the gross amount of royalties pursuant to Article 12(2)(b) of the RP-Japan tax treaty. ( BIR Ruling No. DA-ITAD 103-02 dated May 28, 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