BIR Ruling No. 045-82

February 26, 1982 BIR RULING NO. 045-82 205-16 000-00 045-82 Castillo, Laman, Tan & Pantaleon Law Offices Salcedo Center, 138 H. V. de la Costa Street Salcedo Village, Makati Metro Manila Attention: Messrs . Leonides F . Balmeo and Remie A . Noval Gentlemen : This refers to your letters dated November 6 and 20, 1981 requesting opinion as to whether or not E. Merck Pharmaceuticals, Inc. (Merck Pharmaceuticals) is subject to the 3% contractor's tax and, in the affirmative, the items subject thereto. You have represented that E. Merck Darmstadt (Merck Darmstadt) is a non-resident foreign corporation engaged in the business of manufacturing and selling pharmaceutical products in Germany; that as of April 1, 1977, it entered into a service agreement with Merck Pharmaceuticals, whereby the latter was entrusted the technical promotion and advertisement of the former's products in the Philippines; that on the same date, Merck Pharmaceuticals also entered into another agreement with Pharma Industries, Inc. (Pharma), a domestic corporation and the sole and exclusive distributor of Merck Darmstadt's pharmaceutical products in the Philippines, whereby in order to achieve higher sales, Merck Pharmaceuticals shall undertake the promotion of said products; and that aforesaid Pharma orders the said products directly from Merck Darmstadt through its own technical department and imports the same without the intervention of any entity agent. cdtech You have further alleged that under the contract between Pharma and Merck Pharmaceuticals, the former is obliged to pay the latter a promotional fee of 1% of the value of Pharma's gross sales of the pharmaceutical products of Merck Darmstadt in the Philippines; that, on the other hand, under the contract between Merck Pharmaceuticals and Merck Darmstadt, the latter shall pay the former 5% of the total yearly expenses incurred by Merck Pharmaceuticals in the promotion and advertisement of the said products; that the said promotional fees being insufficient for the extensive operations of Merck Pharmaceuticals, the parties agreed that the difference between the total promotional expenses and the total promotional fees paid by both Pharma and Merck Darmstadt shall be reimbursed and borne by the latter. Finally, you have represented that Merck Pharmaceuticals is engaged merely in the advertising business specifically on the technical promotion and advertisement of pharmaceutical products and does not deal whatsoever in the importation of the said drugs nor does it have any business dealings with drugstores, wholesalers and other marketing outlets of drugs. In reply, I have the honor to inform you that, under the foregoing facts, your client, Merck Pharmaceuticals, is an independent contractor; hence, it is subject to the annual fixed tax of P100.00 and to the 3% tax on its gross receipts, pursuant to Sections 192(1) and 205(16) of the Tax Code. The gross receipts subject to the 3% tax shall consist of the promotional fee of 14% paid by Pharma based on the value of the products sold by Pharma, the promotional fee of 5% paid by Merck Darmstadt based on the total yearly expenses incurred by Merck Pharmaceuticals, as well as additional fee which might be received from Pharma and Merck Darmstadt on account of the promotion and advertisement of the products of the latter. cdta Very truly yours, RUBEN B. ANCHETA Acting Commissioner