ITAD BIR Ruling No. 080-14

June 10, 2014 ITAD BIR RULING NO. 080-14 Article 12, Philippines-Japan tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD-019-99 PL Asia Pacific (Phils), Inc. 26/F, Philippines AXA Life Centre Sen. Gil Puyat Ave., 1200 Makati City Attention: Mr. Nilo P. Bandiola Chief Operating Officer Gentlemen : This refers to your tax treaty relief application (TTRA) filed on May 16, 2007, requesting confirmation that the royalty fees to be paid by PL Asia Pacific (Phils), Inc. ("AP Philippines") to Asia Pacific Pharmaceutical Investments Pte., Ltd. ("AP Singapore") are subject to the 25% tax rate under the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") , and that such royalty fees are also subject to the 12% value-added tax (VAT) under Section 108 of the National Internal Revenue Code of 1997 (Tax Code), as amended by Republic Act No. 9337. ICTDEa It is represented that AP Singapore with office address at 41 Science Park Road, #01-29 The Gemini, Singapore Science Park II, Singapore 117610 is a resident of Singapore for income tax purposes and for claiming benefit under the Philippines-Singapore tax treaty, as certified by Ms. Shirlyn Lim, Assistant Registrar, Accounting and Corporate Regulatory Authority (ACRA), Singapore; that it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated 23 April 2007; and that on the other hand, AP Philippines is a corporation duly organized and existing under the laws of the Philippines with principal address at 26/F Philippines AXA Life Centre, Sen. Gil Puyat Ave., 1200 Makati City, Philippines. It is further represented that on 1 December 2005, AP Singapore and AP Philippines entered into a Marketing, Distribution & Registration Services Agreement whereby AP Singapore appointed AP Philippines as the exclusive marketer, distributor, and registration service provider of the Products 1 under the Agreement; that both parties agree that the contract will be for a period of five (5) years; that the contract will commence on 1 December 2005; that the initial period will be from 1 December 2005 to 30 November 2010; that the contract will automatically be renewed for another three (3) years unless six (6) months prior written notice is given in writing; and that the contract is exclusive for Philippines. It is also represented that on 1 January 2006, AP Singapore and AP Philippines entered into a PharmaLinkTM Service Mark Licensing Agreement wherein AP Singapore had authorized AP Philippines to make use of the PharmaLinkTM Service Mark in relation to the undertaking of AP Philippines normal business operations 2 in the Philippines, also for a period of 5 years starting from 1 January 2006; that the contract will be automatically renewed for consecutive periods of five (5) years each, unless one (1) month prior written notice is given in writing by either party prior to expiry of the Initial Contract Term, 3 or any subsequent Renewal Period thereafter; and that the contract is exclusive for Philippines. In return for use, AP Philippines shall pay a Royalty Fee of 3% of its sales and 1% of its service income. It is further represented that AP Singapore shall supply the Products to AP Philippines according to the terms, CIF prices and volumes to be stipulated in formal Purchase Orders by AP Philippines ; that the margins to be granted to in the Territories shall be subject to mutual agreement between the parties, and shall be reviewed quarterly and adjusted where required based upon local market conditions; that within the margins agreed, AP Philippines shall be responsible for marketing and Distribution costs within the territory; that in the event that AP Singapore chooses to supply any of the products to AP Philippines via a local Contract Manufacturer (third party), AP Philippines shall be authorized to purchase stock directly from the designated supplier, subject to copies of all Purchase Orders and Invoices being sent to AP Singapore for approval; that in such case of third party supply, AP Philippines shall pay a Royalty of 10% of Net Sales to AP Singapore in return for use of the brand(s) in the territories; that AP Singapore will supply the Products up to an agreed inventory level of a maximum of ninety (90) days; that any inventory above this level will be supplied on a consignment basis and reconciled on a monthly basis based upon actual sales. TEacSA It is finally represented that the title and the risk of loss or damage shall pass to AP Philippines on delivery at AP Philippines designated warehouse in the territories; that payment terms between the parties are ninety (90) days end of the month ; that AP Philippines shall be responsible for holding and maintaining the local Health Registration and Import License for the Products in the Territories on behalf of AP Singapore ; that for avoidance of doubt, AP Singapore shall maintain at all times ownership of the intellectual property associated with the products, and, upon termination of this Agreement, AP Philippines shall provide due assistance to AP Singapore in transferring where required the local health registration and/or Import License to AP Singapore or a party designated by AP Singapore ; and that 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. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides: "SEC. 28. Rates of Income Tax on Foreign Corporations . . . . (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, the Philippines-Singapore tax treaty may apply to the instant case, particularly its Article 12 which 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, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but, if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed: a) in the case of the Philippines, 15 per cent of the gross amount of the royalties, where the royalties are paid by an enterprise registered with the Philippine Board of Investments and engaged in preferred areas of activities and also royalties in respect of cinematographic films or tapes for television or broadcasting; b) in the case of Singapore, where the royalties are approved under the Economic Expansion Incentives (Relief from Income Tax) Act of Singapore, the royalties shall be exempt; c) in all other cases, 25 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 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 abovecited provisions, royalties arising from sources within the Philippines and derived by a resident of Singapore shall be subject to the following preferential tax rates: (a) a rate not exceeding 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities and for royalties in respect of cinematographic films or tapes for television or broadcasting; or (b) in all other cases, a rate not to exceed 25 percent of the gross amount of royalties. ADETca Such being the case, and since AP Philippines is not a corporation registered with the Philippine Board of Investments which is engaged in preferred areas of activities and that the subject fees are not in respect of cinematographic films or tapes for television or broadcasting, this Office is of the opinion and so holds that the fees paid by AP Philippines to AP Singapore pursuant to the Marketing, Distribution & Registration Services Agreement and the Pharmalink Service Mark Licensing Agreement, being royalties, shall be subject to income tax at the rate of 25 percent, based on the gross amounts thereof pursuant to Article 12 of the Philippines-Singapore tax treaty. Furthermore, the fees paid by AP Philippines are subject to VAT as follows: (1) For payments under the Agreements from 1 December 2005 to 31 January 2006, rate shall be 10%; and (2) For payments under the Agreements from February 2006 onwards, rate shall be 12%, under Section 108 of the Tax Code, as amended by RA No. 9337. Accordingly, AP Philippines , being the payor in control of the payment shall be responsible for the withholding of VAT on royalty payments on behalf of AP Singapore by filing a separate VAT return for and on behalf of AP Singapore 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 from AP Philippines , if it is a VAT registered taxpayer. In case AP Philippines 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, AP Philippines 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 AP Singapore upon its request, and the fourth copy to be retained by AP Philippines as its copy. [Section 4.110.3 (b), Revenue Regulations No. (RR) 7-95, as amended by RR 08-02 (now Section 4.114-2, RR 16-05, as amended by RR 04-07)] 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. Shall mean A) TAPAZOLE[Methimizole] 5 mg Tablets in Pack Sizes of 100's/ Bottle. B) LIFUROX[Cefuroxime] 750mg Vial in Pack Sizes of 1 Vial/carton. 2. Shall include but not limited to market research, registration, importation, distribution, advertising and promotion of pharmaceutical products in the Philippines. 3. Shall be from January 1, 2006 to December 31, 2010. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.