ITAD Ruling No. 105-00

August 7, 2000 ITAD RULING NO. 105-00 RP-USA Art. 13 RP-Netherlands, Art. 12 BIR Ruling 129-98 ITAD #54-00 Joaquin Cunanan & Co. 14/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Mary Assumption S. Bautista Principal Tax Services Department Gentlemen : This has reference to your application for tax treaty relief dated February 24, 2000 on behalf of your client, Bristol-Myers Squibb (Philippines), Inc. (BMS-Phils.) for the availment of the 15% final withholding tax rate on royalty payments made by BMS-Phils. to Bristol-Myers Squibb Company (BMSC) pursuant to RP-USA Tax Treaty in relation to RP-Netherlands Tax Treaty. It is represented that BMSC is a nonresident foreign corporation organized and existing under the laws of the State of Delaware; that BMS-Phils. is a domestic corporation duly organized and existing under Philippine laws; that on January 1, 1998, BMSC entered into an Administrative and Technical Services Agreement (Agreement) with BMS-Phils. whereby BMSC agreed to provide BMS-Phils. with services and guidance enumerated in the Agreement such as, but not limited to marketing, sales, promotional and distribution planning and techniques; that in consideration for all services and guidance in different fields, BMS-Phils. agreed to pay an annual administrative and technical services fee (royalty fee) in the amount equal to three percent (3%) of the net sales for the year of all products sold by BMS-Phils. In reply, please be informed that under the most favored nation provision of the RP-US Tax Treaty [Art. 13, paragraph (2)(b)(iii)], the tax imposable on royalties derived by a resident of the United States 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. Corollarily, Article 12(b) of the RP-Netherlands Tax Treaty provides that royalties arising 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. Such being the case and since BMS-Phils. is not registered and engaged in preferred areas of activities in the Philippines, royalties arising in the Philippines and payable to BMSC 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. (BIR Ruling No. 129-98 and ITAD Ruling No. 54-00) CaAIES Moreover, the said royalties based on the net sales shall be subject to 10% value-added tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code and that BMS-Phils. shall, before making payment of royalties to BMSC, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return for and in behalf of BMSC. The duly validated VAT declaration/return is sufficient evidence for BMS-Phils. in claiming input tax credit. (Section 4.110-3(b) of Revenue Regulation No. 7-95) In fine, the royalties paid by Bristol-Myers Squibb (Philippines), Inc. (BMS-Phils.) to Bristol-Myers Squibb Company (BMSC) is subject to tax at the rate of 15 per cent. Furthermore, BMS-Phils. shall, on behalf of BMSC, withhold the 10 per cent VAT due by filing a separate VAT return for BMSC using BIR Form 1600. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours , (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal and Inspection Group