ITAD BIR Ruling No. 005-09

February 12, 2009 ITAD BIR RULING NO. 005-09 Article 12 of the Philippines-Switzerland tax treaty; NIRC of 1997 Bayer Philippines Incorporated Bayer House, Canlubang Industrial Estate Calamba, Laguna 4028 Attention: Ms. Eva Marlene B. Villena Finance & Accounting Manager Mr. Homer T. Soniega Tax Supervisor Gentlemen : This refers to your letter dated 4 August 2006, requesting confirmation of your opinion that any royalty payments due to Bayer Consumer Care AG (BCC) for the use of trademarks in connection with the sale of certain products by Bayer Philippines, Inc. (Bayer Phil.) by virtue of their Manufacturing License and Distribution Agreement, is subject to final withholding tax at a preferential tax rate not exceeding to 15% of the gross amount of the royalties, pursuant to the Article 12 of the Philippines-Switzerland tax treaty. 1 It is represented that BCC (formerly called Roche Consumer Health AG) is a corporation duly organized and existing under the laws of Switzerland, with principal place of business at Peter Merian-Strasse 84, CH-4052 Basel, Switzerland; that it is not engaged in trade or business in the Philippines; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Philippine Securities and Exchange Commission dated 15 August 2006; that Bayer Phil. is a domestic corporation with principal office at Bayer House, Canlubang Industrial Estate, Calamba, Laguna; and that it is primarily engaged in the manufacture, sale and importation of chemical, medicinal, pharmaceutical and biological products. TIEHDC It is further represented that on 11 November 2005, BCC and Bayer Phil. executed the said Manufacturing License and Manufacturing Agreement (Agreement); that by virtue of said Agreement, BCC grants a non-exclusive, non-transferable, limited license to use its respective manufacturing know-how to make and have made on behalf of Bayer Phil. the "Local Products" as listed in Appendix 2 thereof (a copy of which is attached and forms an integral part of this ruling); and that BCC grants a non-exclusive, non-transferable license to use the trademarks only in connection with such Local Products. In reply, please be informed that Article 12 of the Philippines-Switzerland tax treaty provides: "Article 12 ROYALTIES 1. Royalties arising in a Contracting State and paid to a resident of the other Contracting state may be taxed in that other State. 2. However, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. 3. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the aforequoted provisions, the tax imposed on royalties derived by a resident of Switzerland from sources within the Philippines may be taxed in Philippines at a rate not exceeding 15 per cent of the gross amount of the royalties. ITDSAE In view thereof, this Office is of the opinion as it hereby holds that the payment for the grant of a non-exclusive, non-transferable, and limited license to use the manufacturing know-how and the trademarks of BCC which constitutes royalty payments arising from said Agreement between BCC and Bayer Phil. are subject to a 15% final withholding tax, based on the gross amount of the royalties, pursuant to Article 12 (2) of the Philippines-Switzerland tax treaty. Furthermore, the fees paid by Bayer Phil. are subject to the 10% 2 value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997, as amended by Republic Act No. 9337. Accordingly, Bayer Phil., being the payor in control of the payment shall be responsible for the withholding of VAT on such fees on behalf of BCC by filing a separate VAT return for and on behalf of BCC using BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as sufficient basis for the claim of input tax to be applied against the output tax that may be due to Bayer Phil., if it is a VAT-registered taxpayer. In case Bayer Phil. is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as an "expense" or an "asset", whichever is applicable. In addition, Bayer Phil. is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to BCC upon its request, and the fourth copy to be retained by Bayer Phil. as its file copy. [Section 4.110-3 (b), Revenue Regulations (RR) No. 7-95, as amended by RR Nos. 4-02, 8-02, and 14-02 (now Section 4.114-2 (b), RR No. 16-2005, as amended by RR No. 4-2007); Section 4.114 (D), RR No. 2-98, as last amended by RR No. 28-03] This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue Footnotes 1. Formally known as the CONVENTION BETWEEN THE REPUBLIC OF THE PHILIPPINES AND THE SWISS CONFEDERATION FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO TAXES ON INCOME. 2. Effective February 1, 2006, the rate is 12%.