BIR Ruling No. 701-2020

REPUBLICOF THE PHILIPPINES

DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE

Quezon City

RA No. 7227 RR No. 16-99 000-00 O- 0 1- Person to Contac: Chief Law&Legislative Division Tel Nos. 926-55-36/927-09-63

Date: DEC 2 9 2020

MR. KOJI MORISADA

N2835 Jose Abad Santos Avenue corner Bayanihan St. President, Sumidenso Automotive Technologies Asia Corporation Clark Freeport Zone, Pampanga

Sir:

the Company) is deductible in computing gross income subject to the 5% preferential tax rate otherwise known as the Base Conversion and Development Act of 1992), as amended: under the Republic Act (R.A) No. 9400 (An Act Amending R.A. No. 7227, as amended, royalties being paid by Sumidenso Automotive Technologies Asia Corporation (SATAC or This refers to your letter dated June 6, 2018 requesting, in effect, for a ruling that the

registered with the Securities and Exchange Commission (SEC) with office address and Freeport Zone, Pampanga. The Company is a wholly owned subsidiary of Sumitomo Wiring parent company is Sumitomo Electric Industries, Ltd. (SEI), a company also organized in principal place of business at N2835 Jose Abad Santos Avenue corner Bayanihan Street, Clark Systems, Ltd. (SWS or the Parent Company), a company organized in Japan, and the ultimate Japan. As represented, SATAC is incorporated and domiciled in the Philippines. It,is

center designing automotive wiring harness and other related automotive components; (2) computer software, and software development of business processes and related systems design and development of automotive electrical, electronic and mechanical components, support for its affiliate companies, both domestic and overseas but not engaging in electrical delivery of automotive wire harness materials for its domestic and overseas affiliate companies. engineering profession; and (3) management activities in the aspect of quality, cost and The primary purpose of the Company is (1) the establishment and operation of technical

entitled to the five percent (5%) special tax on gross income under section 2 of R.A. No. 9400 earned in lieu of national and local taxes. As a registered enterprise under Clark Freeport Zone Authority (CFZ), the Company is

former shall use the intagible property of the latter. As consideration, the SATAC shall pay royalties to the SWS. SATAC and SWS entered into an Intangibles Licensing Agreement, whereby the

O

0T-701-2020 UEC 2 9 2020

Mr. Koji Morisada (Sumidenso Automotive Technologies Asia Corporation)

Page 2 of 3

Since the royalty expense is only incurred as the service is rendered, it is recorded as part of the Company's cost of services.

Costs of services and general and administrative expenses are expenditures that arise in

depreciation of service equipment, utilities, and communication, supplies and other expenses the course of the ordinary operations of SATAC. Cost of services include direct labor,

related to services. Such costs are recognized when the related sales have been 'recognized. General and administrative expenses constitute costs of administering the business and are recognized in profit or loss as incurred.

In reply, please be informed that Revenue Regulations (RR) No. 16-99 implementing Section 12 (c) of Republic Act (RA) No. 7227, otherwise known as the "Bases Conversion and Development Act of 1992", as amended by RA 9400, allows enterprises registered in the Subic

earned," as follows: income subject to the 5% final tax. Section 3 thereof modifies the definition of "gross income Special Economic and Freeport Zone to deduct royalty payments when calculating gross

"SECTION 3. Section 3 of Revenue Regulations No. 1-95 is hereby

thereto a sub-section (p), to read as follows: amended by adding paragraph (4) under sub-section (o) thereof and by adding

'o. Gross Income Earned.

l) xxx xxx xxx 2) xxx xxx xxx 3) xxx xxx xxx 4) Subic Bay Regional Enterprise. -- For purposes of this paragraph, the term "Gross income earned" refers to the gross sales or gross revenues derived from the business activity within the zone, net of sales discounts and sales returns and allowances and minus the costs of sales or direct costs and other costs that are material in the operations of the business and involves a significant amount in determining the profitability and viability of the business (but before any deduction for administrative expenses or incidental losses during a given taxable period). For financial enterprises, gross income shall include interest income, gains from sales, and other income, net of allowable deductions.

of gross income earned for the following specific types of The following deductions shall be allowable for the calculation.

enterprises:

(a)xxxxxxxxx

(b Service enterprises

Direct salaries Service supervision salaries

OT-701-2020 DEC 2 9 2020 Mr. Koji Morisada (Sumidenso Automotive Technologies Asia Corporation) Page 3 of 3

Loss on foreign exchange translation' " (Emphasis supplied) Research & Development Interest & financial charges on working capital Direct Materials, supplies used or resold to Depreciation of machineries, equipment and Corporate management salaries Marketing and sales salaries Royalty Fees Travel and Entertainment expenses Communication expenses Outside Professional Services another SBMA registered enterprise buildings owned and/or constructed Equipment lease payments Financing Charges associated with fixed assets Rent and utility charges for buildings and capital Administrative salaries Advertising Equipment

enterprises are entitled to deduct Royalty Fees in calculating their gross income earned during a given taxable period. Based on the abovementioned Revenue Regulations, SBMA-registered Service

Section 12 (c) of RA No. 7227 and implemented by RR No. 16-99, provided that the agreement that gave rise to the royalty payment is actually and fully substantiated and provided further that the corresponding withholding taxes thereon are duly paid. deductible in computing gross income subject to the 5% preferential tax rate as defined under In view of the foregoing, this Office holds that the royalties being paid by SATAC is

if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. This ruling is being issued on the basis of the foregoing facts as represented. However.

Very truly yours,

1e3ane

K-1 Commissioner of Internal Revenue CAESAR R. DULAY L 038651

1 BIR Ruling No. DA-280-05 dated June 23, 2005 and BIR Ruling No. DA 067-2005 dated February 28, 2005.