ITAD Ruling No. 055-04

May 27, 2004 ITAD RULING NO. 055-04 Article 13, Philippines-United States tax treaty Article 12, Philippines-China tax treaty BIR Ruling No. DA-ITAD-101-03 Joaquin Cunanan & Co. 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Ms. Mary Assumption S. Bautista-Villareal Principal, Tax Service Gentlemen : This refers to your letter dated December 30, 2003 requesting confirmation of your opinion that the royalties paid by your client, Bristol-Myers Squibb (Philippines), Inc. (BMS Phil) to Bristol-Myers Squibb Company (BMSC) are subject to the preferential tax rate of 10 percent (10%) pursuant to the " most-favored-nation " clause of the Philippines-United States tax treaty in relation to the Philippines-China tax treaty. It is represented that BMSC is a nonresident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal address at 345 Park Avenue, New York, New York 10154; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated December 30, 2003; that BMS Phil is a domestic corporation duly organized and existing under Philippine laws; that on 1998, BMSC and BMS Phil entered into an Administrative and Technical Services Agreement (ATSA of 1998) which had a validity period of five (5) years effective January 1, 1998; that under the ATSA of 1998, BMSC agreed to provide BMS Phil with advisory and technical services enumerated therein such as but not limited to marketing, sales, promotional and distribution planning and techniques; that in consideration for the above services, BMS Phil agreed to pay an annual administrative and technical services fee in the amount equal to three percent (3%) of the net sales for the year of all products sold by BMS Phil; that upon expiration of the ATSA of 1998, BMSC and BMS executed on January 1, 2003 a second Administrative and Technical Services Agreement (ATSA of 2003) with the same terms and conditions as that of ATSA of 1998; and that the ATSA of 2003 and its Addendum complies with the provisions of the Intellectual Property Code on Voluntary Licensing under Certificate of Compliance No. 5-2003-00137 issued by the Intellectual Property Office (IPO) on April 1, 2004, valid for 5 years from January 1, 2003 to December 31, 2007. HTcDEa In reply, please be informed that Article 13 of the Philippines-United States tax treaty provides as follows: "Article 13 "ROYALTIES "(1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. "(2) However, the tax imposed by that other Contracting State shall not exceed (a) . . . (b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties, (ii) 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 (iii) 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. (Emphasis supplied) "(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 films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience. The term `royalties' also includes gains derived from the sale, exchange or other disposition of any such right or property which are contingent on the productivity, use, or disposition thereof. "xxx xxx xxx" Under the " most-favored-nation " clause found in Article 13(2)(b)(iii) of the Philippines-United States tax treaty, 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. In this light, Article 12 of the Philippines-China tax treaty, which became effective on January 1, 2002, 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 laws of that State, but if the recipient is the beneficial owner of the royalties, 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. (Emphasis supplied) 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. HICATc "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 cinematography films, or films or tapes for radio or television 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" In the case of Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals , G.R. No. 127105 promulgated on June 25, 1999, the Supreme Court interpreted the " most-favored-nation " clause particularly the phrase "paid under similar circumstances" as referring to the manner of payment of taxes and not to the subject matter of the tax which is royalties. Hence, the " most-favored-nation " clause of the Philippines-United States tax treaty must be interpreted not only in relation to Article 12 of the Philippines-China tax treaty but also in connection with the provisions on the elimination of double taxation of both the Philippines-United States and Philippines-China tax treaties. A perusal of the Philippines-United States and Philippines-China tax treaties, particularly their provisions on the avoidance of double taxation, shows a similarity on the manner of payment of taxes, that is, the allowable foreign tax credit in both treaties is the amount actually paid in the Philippines. Such being the case, this Office is of the opinion and so holds that royalty payments by BMS Phil to BMSC beginning January 1, 2002, under the ATSA of 1998 and ATSA of 2003, are subject to the preferential tax rate not exceeding 10 percent of the gross amount of royalties pursuant to the "most-favored-nation" clause of the Philippines-United States tax treaty in relation to Philippines-China tax treaty. ( BIR Ruling No. DA-ITAD-101-03 dated July 24, 2003 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service