ITAD Ruling No. 012-01

February 16, 2001 ITAD RULING NO. 012-01 Art 12, RP-Russia Art. 12, RP-Netherlands Art. 13, RP-US ITAD 54-00 121-00 A . M . Sison , Jr . & Associates Suite 2002-A Security Bank Centre 6776 Ayala Avenue, 1226 Makati City P.O. Box 3280 MCPO Attention: Atty . Antonio L . Cardio Gentlemen : This refers to your letter dated October 3, 2000, requesting for confirmation of your opinion that the royalties paid by Johnson & Johnson Philippines, Inc. (JJP) to Johnson & Johnson International (JJI) are subject to tax at a rate of 15% percent pursuant to the "most favored nation" clause of the RP-US Tax Treaty in relation to the RP-Netherlands and RP-Russia Tax Treaties. It is represented that JJI is a non-resident foreign corporation duly organized and existing under the laws of the United States of America with principal address at One Johnson & Johnson Plaza, New Brunswick New Jersey, U.S.A.; that it is not registered as a corporation/partnership licensed to do business in the Philippines as per Securities and Exchange Commission certification issued on June 22, 2000; that JJP is a corporation duly organized and existing under Philippine laws with principal address at Edison Road, Barrio Ibayo, Paraaque City, Metro Manila; that as per Renewal of Licensing Agreement dated October 5, 1995 between JJI and JJP, the latter was granted the right to continue utilizing licensed know-how including information, advise and assistance in connection with the manufacturing operations, products and process know-how, sales, including market research, and administrative matters and finance, as well as certain rights to use the patents and trademarks in connection with the manufacture and sale of pharmaceutical products, hospital and medicinal products and health-care and consumer products; that in consideration of the aforementioned rights/license granted to JJP, JJP shall pay JJI a royalty of five percent of the former's net sales on such products; that the said Agreement is covered by Certificate of Registration No. 1762 issued by the Intellectual Property Office (IPO). In reply, please be informed that under the "most favored nation" clause provision of the RP-US Tax Treaty [Art. 13(2)(b)(iii)], the tax imposed on royalties derived by a resident of the United States from sources within the Philippines shall be the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. Article 12(b) of the RP-Netherlands Tax Treaty provides that royalties arising in the Philippines and paid to a resident of Netherlands may be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties in cases other than royalties paid by an enterprise registered in preferred areas of activities in the Philippines. Similarly, Article 12(2) of the RP-Russia Tax Treaty provides that royalties arising from the Philippines and paid to a resident of Russia may also be taxed in the Philippines but the tax so charged shall not exceed 15 per cent of the gross amount of royalties. STHAaD Such being the case, and since JJP is not registered and engaged in preferred areas of activities in the Philippines, royalties arising in the Philippines and payable to JJI are subject to Philippine tax at the rate of 15 per cent pursuant to Article 13(2)(b)(iii) of the RP-US Tax Treaty in relation to Article 12(b) of the RP-Netherlands Tax Treaty and Article 12(2) of the RP-Russia Tax Treaty. (ITAD 54-00 and 121-00 dated March 07 and August 29, 2000) Moreover, the said royalties based on the net sales shall be subject to 10 per cent Value Added Tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code. JJP shall, before making payment of royalties to JJI, withhold and remit to this Bureau the 10 per cent VAT due thereon by filing a separate VAT return for and on behalf of JJI using BIR Form 1600 (Monthly Remittance Return of VAT and Other Percentage Taxes Withheld). The duly validated VAT declaration/return is sufficient evidence for JJP in claiming input tax credit. (Section 4.110-3(b) of Revenue Regulation No. 7-95) This ruling is issued on the basis of the foregoing representation. However, if upon investigation, it will be disclosed or discovered that the facts are different, then this ruling shall be considered null or void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group