ITAD BIR Ruling No. 030-11

January 28, 2011 ITAD BIR RULING NO. 030-11 Article 12, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-012-02; BIR Ruling No. DA-ITAD-041-02; BIR Ruling No. DA-ITAD-003-03; BIR Ruling No. DA-ITAD-100-03; BIR Ruling No. DA-ITAD-059-08 Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero Street Salcedo Village, 1227 Makati City Attention: Atty. Joseph Gregson A. Castillo Legal Counsel Gentlemen : This refers to your Tax Treaty Relief Application [TTRA] on behalf of Mundipharma B.V. ("Mundipharma") , on the royalty fees paid to it by Mundipharma Distribution GMBH Philippine Branch ("MDGPH") pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that Mundipharma , (formerly Mundi-International Pharmaceuticals B.V.) with address at De Wel 20, 3871 MV Hoevelaken, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Inspector of the Tax Administration of Belastngdienst/Rivierenland/kantoor Arnhem, the Netherlands dated September 24, 2010; that based on its Incorporation of a Private Company, Mundipharma is private company with limited liability incorporated under the laws of the Netherlands with authorized capital of two hundred thousand Dutch Guilders (Dfls.200,000) divided into twenty thousand (20,000) shares with a par value of ten Dutch Guilders (Dfls.10) each; that Mundipharma is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on September 21, 2010; and that, on the other hand, MDGPH is a domestic corporation with principal office address located at Unit 1706-1709 Robinsons Equitable Tower, No. 4 ADB Avenue, Poveda Street, Ortigas, Pasig City. It is further represented that on December 24, 2009, Mundipharma and MDGPH entered into a Manufacturing License Agreement ("Agreement") whereby Mundipharma grants to MDGPH the right to manufacture, package, warehouse, use, distribute, market, promote and sell within the Territory 1 the Product 2 using the Know-How 3 and/or Trademark, 4 as hereinafter provided, specifically: CHEIcS Betadine Products 1.1 Antiseptic Solution 10% w/v 1.2 Antiseptic Solution Standardized 10% w/v 1.3 Antiseptic Solution 10% w/v 1.4 Skin Cleanser 7.5% w/v 1.5 Feminine Cleanser 7.5% w/v 1.6 Water disinfectant 8% w/v 1.7 Ointment 10% w/v 1.8 Gargle Mouthwash 1% w/v 1.9 Whirlpool Concentrate 10% w/v 1.10 Antiseptic Paint 10% q/v 1.11 Vaginal Douch 10% w/v 1.12 Vaginal Pessary 200 mg. 1.13 Cream 5% w/v 1.14 Shampoo 4% w/v It is further represented that the Agreement shall commence on January 1, 2010 and, unless sooner terminated pursuant to the provisions of paragraph 18, 20.6.2 or 20.8.4, shall be for an initial term of ten (10) years expiring on December 31, 2019, and shall continue thereafter for one (1) year unless and until terminated at the end of the initial or any continuation term by either Mundipharma and MDGPH not less than six (6) months prior written notice of termination; that in consideration for the grant, MDGPH shall pay to Mundipharma a royalty, net of taxes, at a rate of seven percent (7%) on MDGPH's Net sales of the Product provided further, that for sales of the Product to Associates or to related persons, firms or corporations, royalty shall be calculated as provided in paragraph 4.2.2 of the Agreement, if MDGPH sells the Product to an Associate, or to related person, firm or corporation, or to a chain of such Associates, related persons, firms or corporations or any combination thereof, then the royalties payable shall be calculated based on the higher of either (a) the Net Sales of the Product of such Associate, person, firm, corporation or if to a chain the last in the chain; or (b) MDGPH's usual invoiced sales in arms length transactions after deduction of value-added or other sales taxes; and that, lastly, the issue or transaction subject of the above application 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 based on the Sworn Statement executed by MDGPH dated November 23, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to royalty payments received by nonresident foreign corporations. It provides: "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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): 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" Thus, you invoked the provisions of the Philippines-Netherlands tax treaty. Article 12 of the Philippines-Netherlands tax treaty provides as follows: "Article 12 ROYALTIES 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. ADEaHT 2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and b) 15 per cent of the gross amount of the royalties in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. 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 radio or television broadcasting, any patent, trademark, 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" Under paragraph 4 above, the term "royalties" 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 radio or television broadcasting, any patent, trademark, 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. Thus, payments made by MDGPH to Mundipharma for the right to manufacture, package, warehouse, use, distribute, market, promote and sell within the Philippines the Product using the Know-How and Trademark, are, for tax treaty purposes, royalties. Considering that MDGPH is not registered and engaged in preferred areas of activities in the Philippines, such royalty payments to be paid by it to Mundipharma are subject to 15 percent income tax, based on the gross amount thereof, pursuant to paragraph (2) (b) of Article 12 of the Philippines-Netherlands tax treaty. (BIR Ruling No. 012-02 dated January 29, 2002; BIR Ruling No. DA-ITAD-041-02 dated April 5, 2002; BIR Ruling No. DA-ITAD-003-03 dated January 15, 2003; BIR Ruling No. DA-ITAD-100-03 dated July 16, 2003; and BIR Ruling No. DA-ITAD-059-08 dated August 11, 2008) Finally, as regards value-added tax (VAT), the royalties for the right to manufacture, package, warehouse, use, distribute, market, promote and sell within the Philippines the Product using the Know-How and Trademark to be paid by MDGPH to Mundipharma are subject to VAT under Section 108 (A) of the Tax Code of 1997, as amended, to wit: "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%) 5 of gross receipts derived from the sale or exchange of services, including the use or lease of properties. . . . The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; xxx xxx xxx" With regard to the procedures for the withholding and the payment of the VAT, Sections 4 and 6 of Revenue Regulations No. 4-2000, Section 3 of Revenue Regulations No. 8-2002, and Section 7 of Revenue Regulations No. 14-2002, provide that MDGPH shall be responsible for the withholding of the VAT on the royalties before remitting them to Mundipharma . In remitting to the Bureau of Internal Revenue the VAT withheld on the royalties, MDGPH shall use BIR Form No. 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, MDGPH may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. In addition, MDGPH is required to issue in quadruplicate the Certificate of Final Tax Withheld at Source (BIR Form No. 2306), the first three copies for Mundipharma and the fourth copy for MDGPH 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. acHETI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. "Territory" shall mean the Republic of the Philippines. 2. "Product" shall mean the pharmaceutical preparation(s) for human therapy brief particulars of which are set forth in Annex II of the Agreement and if more than one, any one or more of such preparations as the context admits. 3. "Know-How" shall mean the information, procedures and instructions, knowledge, experience, data (including, without limitation, toxicological, pharmaceutical, clinical and medical data, health registration data marketing data and all other data), designs, dossiers (including without limitation, manufacturing, assay and quality control dossiers), manufacturing formulae, processing specifications, sales and medical material and technology relating to or concerning any relevant patents and/or Product whether of the foregoing description or not and whether committed to writing or not which has been or shall be disclosed to MDGPH by or on behalf of Mundipharma ; including without limitation the information described in Annex I as the same may be complemented from time to time by or on behalf of Mundipharma . 4. "Trademark" shall mean the trademark(s) and logo(s), if any, brief particulars of which are set forth in Annex III hereto and if more than one, any one or more of such trademarks as the context admits and shall include any other trademark(s) or logo(s) designated from time to time hereunder by Mundipharma for use with the Product during the continuance of this Agreement and shall further include where applicable translations and/or transcriptions of any Trademark from Roman characters into any other characters. 5. 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.