Exemption from Philippine Income Tax — Reimbursements of Actual Expenses

January 4, 1990 BIR RULING NO. 001-90 25 039-89 001-90 Gentlemen : This refers to your letter dated April 28, 1989 requesting confirmation of your opinion to the effect that service fees payable by Pfizer, Inc. (PI) to Pfizer International, Inc. (Pfizer International, Inc. (PII)) under the Medical and Marketing Support Services Agreement between the parties are not subject to Philippine withholding tax. It is represented that PI is a corporation duly organized and existing under the laws of the Philippines; that it is engaged in the manufacture and sale of pharmaceutical and animal health products in the Philippines; that PII is a corporation duly organized and existing under the laws of New York, U.S.A.; that it is a non-resident foreign corporation not engaged in trade or business in the Philippines; that on June 1, 1984 PI and PII entered into a Medical and Marketing Support Services Agreement wherein the latter agreed to provide medical and marketing services to PI to achieve the economic benefits of centralization of various technical support services concerning the production and sale of pharmaceutical and animal health products; that the agreement does not involve any transfer of technology, and therefore is not subject to approval of the Bureau of Patents, Trademarks and Technology Transfer; that the agreement is to remain in force and effect for a term of 5 years from June 1, 1984 to June 1, 1989 renewable automatically if either party decides to terminate the same; that specifically, the services to be rendered by PII under the Agreement are as follows: A. Marketing Services (a) Business Development and Launch Plans (b) Training Materials for Salesmen (c) Promotional Materials (d) Symposia (e) Motion Pictures and Video tapes (f) Education Material for Physicians (g) Reprints of Clinical Studies (h) Others B. Medical Services (a) International Registration Dossiers (b) Clinical Development Program (c) Clinical Programs after Launch (d) Coordinate defense strategies on adverse reactions information and challenges from outside agencies; that in consideration of the services rendered by PII to PI under the agreement, PI will pay PII the cost of medical and marketing support services without any mark-up or profit element; and that the cost shall consist generally of material costs, production costs, facility charges, consultation fees, travelling and accommodation costs, payrolls and other operating costs incurred by PII in connection with the provision of the above described services to PI. In reply thereto, I have the honor to inform you that under Article 13, par (3) of the RP-US Tax Treaty, the term "royalties" means payments of any kind received as a consideration among others for information concerning industrial, commercial or scientific experience. To be considered as royalties, there must be transferred in this country of technology, equipment or other property where the payee has proprietary interest. Specifically, there must be transfer of scientific, technical, industrial or commercial knowledge or information. (BIR Ruling No. 093-89 dated May 2, 1989). In the instant case, the services of PII as stated in the letter dated January 4, 1988 of the Bureau of Patents, Trademarks & Technology Transfer, basically do not involve the transfer of technology nor are they performed in the course of producing/manufacturing the products being marketed by PI but related to the provision of technical support services function concerning the production and sale of pharmaceutical and animal health products. Moreover, payments to be made by PI to PII covering the cost of medical and marketing support services consisting of material costs, production costs, facility charges, consultation fees, travelling and accommodation costs, payrolls and other operating costs incurred by PII in connection with the provision of the aforementioned services to PI are mere reimbursement of actual expenses. In view thereof, this Office is of the opinion and so holds that payments to be made by PI to PII not being considered royalties and are mere reimbursements of actual expenses without any mark-up or profit element are not subject to Philippine income tax and consequently to the withholding tax under Section 25(b) (1) in relation to Section 50 (a) both of the Tax Code. Very truly yours, (SGD.) JOSE U. ONG Commissioner