ITAD BIR Ruling No. 013-11

January 19, 2011 ITAD BIR RULING NO. 013-11 Article 12, Philippines-Germany tax treaty; Section 28, NIRC of 1997; BIR Ruling No. 75-88; BIR Ruling No. DA-ITAD-109-02 Bayer CropScience, Inc. 3/F Bayer House Canlubang Industrial Estate Calamba, Laguna, 4028 Attention: Ms. Eva Marlene B. Villena, Head-Finance & Accounting Mr. Homer T. Soniega, Tax Officer. BPI Gentlemen : This refers to your letter dated August 15, 2008 requesting confirmation that the royalty payments due to Bayer CropScience AG (hereinafter referred to as "BCS AG") for the use of trademarks in connection with the sale of certain products by Bayer CropScience, Inc. (hereinafter referred to as "BCSI") are subject to final withholding tax at a preferred tax rate that should not exceed ten percent (10%) of the gross amount of royalties, pursuant to Article 12 of the Convention between the Government of the Republic of the Philippines and the Government of the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-Germany tax treaty" ). DIHETS It is represented that BCS AG is a nonresident foreign corporation duly organized and existing under the laws of Germany, with principal place of business at Kaiser-Wilhelm-Allee, D-51368 Leverkusen, under taxpayer reference number: 230/5740/0859 as evidenced by a Certificate of Fiscal Residence issued by the German tax authority dated January 14, 2009; that BCS AG is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on May 19, 2008; that Bayer CropScience Gmbh (hereinafter referred to as "BCS GmbH" ) is a nonresident foreign corporation organized and existing under the laws of Germany, with principal place of business at Industriepark Hoechst, K607, Brningstrasse 50, D-65926 Frankfurt am Main, Germany; that pursuant to the merger agreement dated February 26, 2007 as well as the approving resolution of BCS AG's general meeting and the shareholders meeting, BCS AG has been merged with BCS GmbH, with BCS AG assuming legal entity and BCS GmbH as the transferring legal entity, as evidenced by a report of the General Meeting dated February 26, 2007; that the said merger was registered and was legally effective on April 2, 2007; that, on the other hand, BCSI is a corporation duly organized and existing under the laws of the Philippines, with business address at Bayer House, Canlubang Industrial Estate, Calamba, Laguna, engaged in the business of manufacturing, processing, buying, selling, importing and exporting all types of agricultural and environmental health related chemicals. It is further represented that on January 8, 2007, BCSI and BCS GmbH entered into a License Agreement (hereinafter referred to as the "Agreement" ), which was amended on March 30, 2007, whereby BCS GmbH grants to BCSI the following: 1. From time to time, and for the first time within thirty (30) days from the latest signature date of the Agreement, BCS GmbH and BCSI will jointly determine which Varieties/Hybrids 1 will be covered by the Agreement and will establish and sign for each such Variety/Hybrid an Addendum to the Agreement, setting forth a detailed description of such Variety/Hybrid, the Trademark 2 (if any) and the license terms and conditions within the framework of the Agreement; 2. Upon signature of each Addendum, BCS GmbH shall grant to BCSI a royalty-bearing license/sublicense under the Rights 3 on the Variety/Hybrid covered, to produce, have produced, sell and have sold such Variety/Hybrid in the Territory, 4 with the right to grant sublicenses for sale only (except if specified otherwise in the Addendum); 3. Each Addendum shall be signed by BCS GmbH and BCSI prior to the commercial launch of the Variety/Hybrid covered by such Addendum. For Varieties/Hybrids which are already on the market in the Territory before the signature date of the Agreement, Addenda will be established and signed within thirty (30) days for said signature date. 4. Once a year, BCS GmbH and BCSI will evaluate the terms and conditions governing each Variety/Hybrid licensed pursuant to the Agreement, and will jointly establish and sign updated Addenda if necessary. In the event and as long as no new Addenda have been made, the same royalty rates will be applied. In consideration of the foregoing, it is represented that BCSI shall pay to BCS GmbH royalties on Net Sales (if applicable) as a remuneration for BCS GmbH's Rights on each respective Variety/Hybrid and for the efforts made by BCS GmbH to develop or license in each respective Variety/Hybrid (whether through own development or through financing of development), such royalties being defined in each Addendum; that on certain Varieties/Hybrid, royalties or other remuneration may be due to third parties, and the calculation base or method may differ in certain cases which will be explicitly addressed in each Addendum, where applicable; that where specified in an Addendum, BCSI shall pay to BCS GmbH a lumpsum fee, whether or not in addition to royalties, with respect to a given Variety/Hybrid; that value-added tax (VAT) shall be added to the agreed royalties, if applicable; that the Agreement complies with provisions of Sections 87 and 88 of Chapter IX, Part II of the Intellectual Property Code on Voluntary Licensing, as certified by the Philippines' Intellectual Property Office per its issuance of the Certificate of Compliance No. 5-2007-00014 dated July 30, 2007; and that the transaction subject of the herein request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved. In reply, please be informed that royalty payments to a nonresident foreign corporation are, in general, covered by Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended. It provides: cTECHI "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., royalties . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In accordance with the foregoing, Article 12 of the Philippines-Germany tax treaty may apply to the subject request for ruling: "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, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: a) 15 per cent of the gross amount of royalties arising from the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films or tapes for television or broadcasting, or b) 10 per cent of the gross amount of royalties arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or from the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under (b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. 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 cinematograph films or tapes for television or broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. xxx xxx xxx" Based on the foregoing, royalty payments to a resident of Germany arising in the Philippines may be taxed at the preferential tax rate of fifteen percent (15%) of the gross amount of the royalties if the royalties are paid in respect of the use of or the right to use cinematograph films and films or tapes for radio or television broadcasting; and 10% if the royalties are paid for the use or the right to use, patent, trademark, design or model, plan, secret formula or process for the industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience. However, the tax rate mentioned in paragraph 2 (b) shall only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. ATCEIc Considering that the subject payments of BCSI to BCS GmbH under the Agreement fall under paragraph 2 (b) of the aforementioned tax treaty being derived from the grant of a right to sublicenses, technologies, patents and patent applications in the field of agricultural seed and biotechnology, and that the Agreement has been approved by a Philippine competent authority i.e. , the IPO, such are considered royalties arising in the Philippines and are subject to Philippine tax at the rate of 10% of the gross amount of royalties, pursuant to Article 12 (2) (b) of the Philippines-Germany tax treaty. (BIR Ruling No. 075-88 dated March 4, 1988; BIR Ruling No. DA-ITAD-109-02 dated May 30, 2002) Moreover, as provided in Section 108 of the Tax Code of 1997, the said royalty payments are subject to value-added tax (VAT): "SEC. 108. 5 Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) 6 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. xxx xxx xxx (3) The supply of scientific, technical, industrial or commercial knowledge or information; xxx xxx xxx" With regard to the procedures for the withholding and the payment of the VAT pursuant to Sections 4 and 6 of Revenue Regulations No. 4-2002, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, BCSI shall be responsible for the withholding of VAT on the royalties fee before remitting it to BCS GmbH. In remitting to the Bureau of Internal Revenue the VAT withheld, BCSI shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). If it is a VAT-registered taxpayer, BCSI may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying such form. On the other hand, if it is a non VAT-registered taxpayer, BCSI may include as part of the cost of the royalty fees to it by BCS GmbH the VAT consequently shifted or passed on to it. In addition, BCSI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies for BCS GmbH and the fourth copy for BCSI as its file copy. This ruling is issued on the basis of the 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "Variety/Hybrids" means each variety or inbred or hybrid of Rice developed or licensed in by GmbH or and Affiliate which is released or in a constituent or a released variety in the Territory. 2. "Trademark" means any trademark or trade name which is registered or in the process of being registered or otherwise protected in the Philippines. 3. "Rights" means patents, plant patents, patent applications, rights to trade secrets, rights to confidential know-how (including but not limited to breeding know-how), plant variety protection and plant breeders' rights, plant breeders' rights applications, rights to germplasm and similar rights, registration rights, owned or licensed-in with the right to grant sublicenses by GmbH. 4. "Territory" means Philippines. 5. Section 108 was amended by Republic Act No. 9337 (An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, As Amended, and for Other Purposes), which was signed into law on May 24, 2005 and became effective on November 1, 2005, to read as: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. Provided, that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%). xxx xxx xxx 6. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.