ITAD Ruling No. 058-05

June 17, 2005 ITAD RULING NO. 058-05 Articles 8 & 5, Philippines-United States of America Tax Treaty; BIR Ruling No. DA-ITAD 24-04 Joaquin Cunanan & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mary Assumption S. Bautista-Villareal Principal, Tax Services Department Gentlemen : This refers to your letters dated August 13, 2004 and February 22, 2005, on behalf of your client, Wyeth Philippines, Inc. (WPI) requesting confirmation of your opinion that the service fees paid by WPI to Wyeth-Ayerst International, Inc. (WAII) are exempt from Philippine income tax pursuant to the pertinent provisions of the National Internal Revenue Code of 1997 and of the Philippines-United States of America tax treaty. It is represented that WAII is a non-resident foreign corporation duly organized and existing under the laws of the State of Pennsylvania, United States of America with principal office address at 500 Arcola Road, Collegeville, Philadelphia, Pennsylvania; that it is not registered either as corporation or as a partnership licensed to do business in the Philippines per Certification of Non-Registration dated August 2, 2004 issued by the Securities and Exchange Commission; that WPI is a domestic corporation duly organized and existing under the laws of the Philippines with principal office address at 2236 Chino Roces Avenue, Makati City; that it is primarily engaged in the importation and exportation of, manufacture and process, buy, sell and deal in all kinds of drugs, medicines, antibiotics, fungicides, nutritional products, foods, milk, milk powders and dairy products, oils, chemicals, and patent medicines, sanitary appliances, glass, and hospital and physician and dental supplies and equipments, and all other kinds of merchandise and supplies usual to the wholesale and retail drug and food business; that on January 1, 2004, WPI and WAIL entered into an Administrative and Consulting Services Agreement (Agreement) covering a period of four years, from January 1, 2004 to December 31, 2007, which is automatically renewable for one-year periods unless terminated by either party; that paragraph 1.1 of the Agreement provides for the services which will be performed outside the Philippines unless in certain instances when the services would require short visits to the Philippines by representatives of WAII, as follows: a. advice and assistance regarding financial issues including, but not limited to, preparation and review of periodic budgets, the procurement of credit facilities and review of loan instruments; b. advice and assistance on accounting policies and treatments; c. advice and assistance with general policies regarding the governmental health registration of pharmaceutical products; d. advice and assistance with marketing, advertising and promotional programs and provision of general product information that may be used in connection with the sale of the products; e. advice and assistance on methods, practices and policies to be used in the corporate operations and sales of the products, including customer and employee relations; f. advice and assistance in the legal, taxation, patent and other professional areas; and g. such other services as WPI may need from time to time. IHCSET and that as consideration for the services rendered, WPI shall pay WAII service fees equal to the costs and expenses incurred by WAII in furnishing said services, with a mark-up of 8% on costs classified as "Internal Costs." However, costs classified as "External Costs" shall be paid to WAIT without a mark-up. In reply, please be informed that Article 8 and Article 5 of the Philippines-United States of America tax treaty provide as follows: "Article 8 BUSINESS PROFITS 1. Business profits of a resident of one of the Contracting States shall be taxable only in that State unless the resident has a permanent establishment in the other Contracting State. If the resident has a permanent establishment in that other Contracting State, tax may be imposed by that other Contracting State on the business profits of the resident but only on so much of them as are attributable to the permanent establishment. "xxx xxx xxx." "Article 5 PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which a resident of one of the Contracting States engages in a trade or business. "2. The term 'fixed place of business' includes but is not limited to: a) A seat of management; b) A branch; c) An office; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse; h) A mine, quarry, or other place of resources; i) A building site or construction or assembly project or supervisory activities in connection therewith, provided such site, project or activity continues for a period of more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. "xxx xxx xxx." It is clear from the aforequoted provisions that if a corporation which is a resident of the United States of America does not carry on business in the Philippines through a permanent establishment situated therein, the profits of such corporation shall not be subject to Philippine income tax. For this purpose, a corporation which is a resident of the United States of America may be deemed to have a permanent establishment in the Philippines, if, among others, the furnishing of services through its employees continue (for the same or a connected project) within the Philippines for a period or periods aggregating more than 183 days. Inasmuch as it has been represented that the services will be performed by WAII outside the Philippines and that its employees did not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to WPI for the year 2004, WAII cannot be considered to have a permanent establishment in the Philippines. With respect to the services to be performed for the years 2005 up to December 31, 2007 and for each year the contract is renewed, WAII is deemed not to have a permanent establishment for as long as its employees do not stay in the Philippines for a period or periods aggregating more than 183 days in the course of their rendition of services to WPI. (BIR Ruling DA-ITAD 24-04 dated March 11, 2004) Moreover, while the compensation for services rendered outside the Philippines is not subject to the 10% VAT, the fees paid for that portion where the services of WAII are rendered in the Philippines are, however, subject to 10% value-added tax (VAT) pursuant to Section 108 of the Tax Code of 1997. Accordingly, WPI, being the resident withholding agent and payor in control of payment shall be responsible for the withholding of the 10% final VAT on such fees before making any payment to WAII. In remitting the VAT withheld, WPI shall use the BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax & Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax to be applied against the output tax that may be due from WPI if it is a VAT-registered taxpayer. In case WPI is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased or treated as "expense" or "asset", whichever is applicable. In addition, WPI is required to issue the Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) in quadruplicate upon request of WAII, the first three copies thereof be given to WAII and the fourth copy to be retained by WPI. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002) 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. cEaACD Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service