Quisumbing Torres

March 16, 2018 ITAD BIR RULING NO. 041-18 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines- Netherlands tax treaty Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City 1634 Taguig City Attention: AAA BBB Gentlemen : This refers to your tax treaty relief application filed on June 27, 2016 requesting confirmation that payments made by Abbott Laboratories (" Abbot Philippines ") to AbbVie Logistics B.V. (" AbbVie ") (formerly WCA Pharmaceuticals Logistics B.V. ) for allowing Abbot Philippines to distribute GlaxoSmithKline products in the Philippines are exempt from income tax 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 "). SCaITA FACTS AbbVie is a foreign corporation organized and existing under the laws of the Netherlands and a resident thereof based on its amended Articles of Incorporation and Certificate of Residence issued by the Arnhem Tax Administration Office in the Netherlands. AbbVie is engaged in the purchase and sale, import and export, manufacturing, processing and packing of pharmaceutical means and hospital equipment, feeding, chemical and other health care products, as well as in the acquisition and alienation of patents, trademarks, secret industrial processes and other sorts of industrial and intellectual property. It is also engaged in trading pharmaceutical products for its own account as well as for the account of third parties. AbbVie is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, Abbot Philippines is a domestic corporation engaged in manufacturing, buying, selling, importing, exporting and trading a broad range of specialized medicines; medical diagnostic instruments and tests; minimally invasive surgical devices; spectrum of nutritional supplements for infants, children and adults; medication management systems and suction products. Based on its Audited Financial Statements as of December 31, 2015, Abbot Philippines ' immediate parent is Abbot Investments Luxembourg SARL of Luxembourg, and its ultimate parent is Abbott Laboratories of the United States of America. On June 30, 2015, Abbot Philippines and AbbVie entered into a Letter Agreement where Abbot Philippines agreed to distribute in the Philippines, on behalf of GlaxoSmithKline Pte. Ltd. (" GSK Singapore "), certain pharmaceutical products (" GSK products ") pursuant to an Agreement between GSK Singapore and Abbot Laboratories Singapore Pte. Ltd. (" Abbott Singapore ") dated January 29, 2010, as amended. Abbot Philippines and AbbVie have existing Distribution Agreement dated October 1, 2014 where Abbot Philippines has been appointed as exclusive distributor of AbbVie 's medical and related products (" Abbot products ") in the Philippines. The Letter Agreement provides that in addition to Abbott products, Abbot Philippines will also distribute GSK products in the Philippines. GSK Singapore is not an affiliate of Abbot Philippines based on the latter's Audited Financial Statements. Under the Letter Agreement, Abbot Philippines shall reflect as a payment on each invoice issued by it to AbbVie an amount equal to the excess of the total discount amount for the period of time in which service fee was earned by Abbot Philippines over the preliminary remuneration amount for such period. The service fee is Abbot Philippines ' compensation for distributing pharmaceutical products in the Philippines, and as reimbursement to Abbot Philippines on the costs it incurred in distributing Abbott products and GSK products. These costs include personnel, facilities, advertising, promotion, product presentation, and sale. Total discount amount means, for any period, the amount equal to the excess of the retail price over the supply price for all products purchased by Abbott Philippines from GSK Singapore during such period. Preliminary remuneration amount means, for any period, an amount equal to the product with a margin of 2.00% multiplied by the aggregate retail price of the products sold by Abbott Philippines to a third party distributor in such period. At the end of each quarter, Abbott Philippines shall provide AbbVie the actual sales date for each product sold by Abbott Philippines in the Philippines. Based on a sworn statement issued by Abbott Philippines on May 31, 2017, Abbot Philippines will offset payments owed to AbbVie for the right granted by AbbVie to Abbot Philippines to distribute GSK products in the Philippines under the Letter Agreement, against such service fee owed by AbbVie to Abbot Philippines under the Distribution Agreement. Total revenues derived by Abbot Philippines from the sale of GSK products are P__________ in 2015 and P__________ in 2014. Based on Abbot Philippines ' Audited Financial Statements, it has total revenues amounting to P__________ in 2015 and P__________ in 2014. GSK products constitute only 0.443% and 0.042% of Abbot Philippines ' revenues in those years. Aside from AbbVie and GSK Singapore, Abbot Philippines have existing distribution agreements with other pharmaceutical companies, namely, Natrapharm Inc., Seville Pharmaceuticals, Inc. and Sandoz Philippines Corporation, which are not affiliates of Abbot Philippines . Based on another sworn statement issued by Abbott Philippines on September 7, 2015, the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. aTHCSE RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived by a foreign corporation not engaged in trade or business in the Philippines is subject to income tax at the rate of 30%, to wit: " SEC. 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)" However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required by any treaty obligation on the Philippine government, to wit: " SEC. 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." Relative thereto, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Netherlands tax treaty provide as follows: " Article 7 BUSINESS PROFITS 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." " Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period." Under Article 7, profits derived by an enterprise of a Contracting State in the other Contracting State may be taxed in the other State, but only so much of the profits as are attributable to a permanent establishment situated in that State. Under Article 5, a permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on, and includes especially, a place of management, a branch, an office, a factory and a workshop. Accordingly, since AbbVie is not engaged in trade or business in the Philippines, and it does not have a branch, an office or other fixed place of business in the Philippines, it does not have a permanent establishment under paragraphs 1 and 2, Article 5 of the Philippines-Netherlands tax treaty. Therefore, payments made by Abbot Philippines to AbbVie for allowing Abbot Philippines to distribute GSK products in the Philippines are exempt from income tax pursuant to paragraph 1, Article 7 of the tax treaty. cAaDHT The income derived by AbbVie constitutes profits from carrying out an entrepreneurial activity (business profits) and subject to the provisions of Article 5 and 7 of the tax treaty as explained below. Abbvie is engaged in the sale, import and export, manufacturing, processing and packing of pharmaceutical means and hospital equipment, feeding, chemical and other health care products, as well as in the acquisition and alienation of patents, trademarks, secret industrial processes and other sorts of industrial and intellectual property. It is also engaged in trading pharmaceutical products for its own account as well as for the account of third parties. Pursuant to the Distribution Agreement and Letter Agreement, Abbott Philippines has the right to distribute Abbott products and GSK products in the Philippines and Abbott Philippines is compensated with a service fee for carrying out this activity. Under the arrangement for the GSK products, if the remuneration amount from the sale of the products (2% of the net sales of the products) exceeds the service fee due to Abbott Philippines , the excess will be remitted to AbbVie that constitutes the latter's net income for allowing Abbott Philippines to distribute GSK products in the Philippines. This income constitutes AbbVie 's compensation for trading pharmaceutical products for the account of unrelated third parties and carried out in the ordinary course of its business. Clearly, this income is covered by the provisions of Articles 5 and 7 of the Philippines-Netherlands tax treaty. 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.) CAESAR R. DULAY Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official document.