BIR Ruling [DA-007-06]

January 13, 2006 BIR RULING [DA-007-06] 57; ITAD-21-04 SGV & Co . 6750 Ayala Avenue 1226 Makati City Attention: Atty. Emmanuel C. Alcantara Co-Head, Tax Services Gentlemen : This refers to your letter dated November 2, 2005 requesting on behalf of the local customers of Johnson & Johnson Pte. Ltd. (JJS),for confirmation that income payments to JJS through Johnson & Johnson Philippines Inc. (JJPI) as independent agent under the Commissionaire Agreement are not subject to any withholding tax under Section 57 of the Tax Code, including the 1% creditable tax to be withheld on income payments made by any of the top ten thousand 10,000 corporations to their local supplier of goods. It is represented that Johnson & Johnson US (JJ-US) is a multinational corporation organized and existing under the laws of the United States; that JJ-US and its international affiliate companies (collectively, J&J Group) are engaged in the business of manufacturing, marketing and distributing healthcare and consumer products worldwide; that Johnson & Johnson Pte. Ltd. (JJS), with business address at 2 International Business Park, #07-01, Tower One, The Strategy, Singapore 609930, was established in Singapore in 1974 and is a wholly-owned subsidiary of JJ-US; that JJS does not have a branch or other presence in the Philippines; that on the other hand, JJPI is also a wholly-owned subsidiary of JJ-US, organized and existing under Philippine laws with principal place of business at Edison Road, Barrio Ibayo, Paraaque City; that starting November 2, 2005, JJPI will convert into a commissionaire agent for JJS/APSC; that under this new structure, JJS acts as the principal operating entity in the Asia Pacific region for Consumer Products; that JJS as the regional entrepreneur is the owner and/or licensee of the manufacturing rights, trademarks, patents, technical know-how and the legal owner of all imported and locally produced goods; that since JJS does not have a branch or other presence in the Philippines, JJPI shall be the independent agent of JJS in the Philippines pursuant to a Service Provider/Commissionaire Agreement; that under the Service Provider/Commissionaire Agreement, JJPI, as independent agent, shall provide services and be responsible for selling and distributing the products of JJS in the Philippines in its own name but for the account and risk of JJS; and that under the amendments to RR No. 2-98 by RR 17-03, it is now required that income payments made by the top ten thousand (10,000) [previously top five thousand (5,000)] private corporations to their local/resident supplier of goods and local/resident supplier of services [formerly only covers supplier of goods], other than those covered by other rates of withholding tax, be made subject to 1% or 2% withholding tax on its purchases of goods or services, respectively. In view of this amendment, it is now being requested by the customers of JJS for a confirmation that their income payments to JJS shall continue to be not subject to any withholding tax. AHECcT In reply thereto please be informed that in ITAD Ruling No. 21-04 dated March 9, 2004, involving a request for a ruling by JJS on the tax consequences of the Commissionaire Agreement, it was ruled, among others, that since JJS does not have a permanent establishment in the Philippines and will not be subject to tax on the business profits it derives from the sale of goods to the customers in the Philippines, it follows that the payments to JJS should not be subject to any withholding tax under Section 57 of the Tax Code, including the 1% creditable tax to be withheld on income payments made by any of the top 5,000 corporations to their local supplier of goods. However, in view of the amendments under RR 17-03, the said ruling will have to reflect the change and, accordingly, those not required to withhold income payments to JJS should be any of its local supplier of goods which belong to the top 10,000 corporations. In view of the foregoing, we hereby confirm that the income payments to JJS through JJPI as independent agent under the commissionaire agreement are not subject to income tax in the Philippines and, consequently, are not to be subject to any withholding tax, including the 1% creditable tax to be withheld on income payments made by any of the 10,000 corporations to their local supplier of goods. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue