Monsanto Philippines, Inc.

January 26, 2009 BIR RULING [DA-(VAT-012) 040-09] 105; RR 16-2005; DA-510-2003; DA-641-2004; DA-162-2007 Monsanto Philippines, Inc. 7F Ayala Life-FGU Center Alabang-Zapote Road, Madrigal Business Park Alabang, Muntinlupa City Attention: Ms. Noemi B. Samson Country Finance Lead Gentlemen : This refers to your letter dated May 30, 2008 requesting for confirmation of your opinion that the sale of intangible assets by Monsanto Philippines, Inc. (MPI) is not subject to the 12% Value Added Tax (VAT) pursuant to Section 105 of the Tax Code of 1997, as amended. It is represented that MPI is a domestic corporation whose primary business is importation, processing, distribution and marketing of agricultural seeds; that it is registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer; that it is owned and controlled by Monsanto Company ("Monsanto-US"), a corporation organized and existing under the laws of the State of Delaware, USA; that Monsanto-US entered into an Asset Sale and Purchase Agreement (Asset Agreement) on a worldwide basis with SinoChem International (Overseas) Pte Ltd. ("SinoChem"), a non-resident foreign corporation based in Singapore engaged in general wholesale trade including general import and export activities and other investment holding activities; that in accordance with such Asset Agreement, MPI executed another agreement with SinoChem whereby the former sold to the latter, for a lump-sum consideration, intangible assets pertaining to its select chemical business including business intellectual property rights, business information, product registrations, benefit (subject to the burden) of the business, and the records. It is further represented that the intangible assets sold to SinoChem pertain to MPI's select chemical business and are not connected or related to MPI's primary business of importation, processing, distribution and marketing of agricultural seeds; and that the sale of intangible assets pertaining to its select chemical business is not in the regular course of business as MPI is engaged in the processing, marketing and sale of agricultural seeds. In view of the above, you now request for confirmation of your opinion that the above transaction is not subject to 12% VAT since it is not made in the ordinary course of trade or business nor is incidental thereto. ICcaST In reply, please be informed that Section 105 of the Tax Code, as amended, and as implemented by Section 4.105-3 of Revenue Regulation No. 16-2005, as amended, provides as follows: "Sec. 105. Persons Liable. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code. xxx xxx xxx The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto , by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity." (Emphasis supplied) Based on the above provision, VAT is imposed only on the sale of goods or services made "in the ordinary course of trade or business, including transactions incidental thereto." Conversely, VAT is not imposed if the sale of goods or services is not made in the regular course of trade or business. We have held in various rulings that the sale of intangible assets ( i.e. , business intellectual property rights, registration data, manufacturing know-how, etc.) is considered a sale of properties that is not made in the course of regular trade or business, or, for that matter, necessary or incidental in carrying out such trade or business in the Philippines. Inasmuch as the sale of intangible assets is unrelated to the regular commercial activity, the sale thereof is not within the contemplation of Section 105 of the Tax Code, as amended. (BIR Ruling No. DA-641-04 dated December 17, 2004, BIR Ruling No. DA-510-03 dated December 17, 2003) In this case, MPI's sale of intangible assets to SinoChem is not made in the ordinary course of MPI's trade or business, which is primarily the importation, processing, distribution and marketing of agricultural seeds. Neither is such sale considered as incidental to MPI's business since the sale of the aforesaid intangible assets is unrelated to its regular commercial activity and is not necessary in MPI's carrying out of its primary function. Moreover, MPI's sale of intangible assets contemplated in the agreement involves not only the transfer of the use or the right to use the intangible assets, but of the title or ownership of the intangible assets in the Philippines. Hence, the fixed transaction price on the sale cannot be considered royalty payments subject to VAT. (BIR Ruling No. DA-641-04 dated December 17, 2004) EHCcIT Considering that the sale of the aforesaid intangible assets by MPI to SinoChem for a lump sum consideration is not made in the regular course of trade or business of MPI nor is incidental thereto, we hereby confirm your opinion that such sale is not subject to 12% VAT. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service