ITAD Ruling No. 110-03

July 29, 2003 ITAD RULING NO. 110-03 RP-US, Art. 12, RP-China Art. 12 BIR Ruling No. ITAD 101-03 BIR Ruling No. ITAD 109-02 RMC No. 46-2002 dated September 2, 2002 Wyeth Philippines, Inc . 2236 Chino Roces Avenue P.O. Box 1207 MCPO 1252 Makati City Attention: Mr. Renato B. Maisog Accounting Manager Gentlemen : This refers to your tax treaty relief application dated December 18, 2002, on behalf of American Home Products Corporation (AHPC) (now Wyeth USA) and American Cyanamid Company (ACC), requesting confirmation that the royalty payments of Wyeth Philippines, Inc. (Wyeth Phils) to AHPC and ACC are subject to the preferential tax of 10% pursuant to the most favored nation clause of the RP-US tax treaty in relation to the RP-China tax treaty. It is represented that AHPC and ACC are corporations duly organized and existing under the laws of the United States of America (USA); with principal office addresses at Five Giralda Farms Madison, New Jersey, USA 07940 and One Campus Drive, Parsippany, New Jersey, USA, respectively; that both AHPC an ACC are not registered either as corporations or as partnerships and have not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated January 22, 2003; that Wyeth Phils is a corporation duly organized and existing under the laws of the Philippines with office address at 2236 Chino Roces Avenue, Makati City; that AHPC, ACC and Wyeth Phils entered into a "License Agreement" wherein AHPC and ACC granted Wyeth Phils exclusive rights to their respective technology and trademarks; that as a consideration, Wyeth Phils shall make payments, as follows: a) To AHPC, a royalty of five percent (5%) in Annex A; two percent (2%) in Annex B and three percent (3%) in Annex E for the net sales of its products manufactured and sold stipulated in the Agreement, and b) To ACC, a royalty of two percent (2%) of the Net Sales of the products manufactured and sold stipulated in the Agreement; that the License Agreement, as amended, between AHPC and Wyeth Phils registered with the Intellectual Property Office under, Certificate of Compliance No. 5-1999-00095 issued on February 29, 2000 which shall be valid for 10 years from 1 January 1999 to 31 December 2008; that the License Agreements, as amended, between ACC and Wyeth Phils is registered with the Intellectual Property Office under Certificate of Compliance No. 5-1999-00096 issued on February 29, 2000 which shall be valid for 10 years from 1 February 1999 to 31 January 2009. In reply, please be informed that Article 13 of the RP-US tax treaty provides, viz : "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. HcSETI "2. However, the tax imposed by that other Contracting State shall not exceed "a) In the case of the United States, 15 percent of the gross amount of the royalties, and "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 . (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" and, in relation thereto, Article 12 of the RP-China tax treaty provides, viz : "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) Pursuant to the aforequoted "most favored nation"' clause under Article 13(2)(b)(iii) of the RP-US 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. Relative thereto, pursuant to Article 12(2)(b) of the RP-China tax treaty, the tax charged shall not exceed 10% of the gross amount of royalties. It is noteworthy that 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. ( BIR Ruling No. ITAD 118-01 dated February 23, 2001 and BIR Ruling No. ITAD 109-02 dated May 30, 2002 ) A plain reading of the RP-US and RP-China tax treaty provisions in the avoidance of the double taxation show a similarity on the manner of payment of the taxes that is, the allowable foreign tax credit on both treaties is the amount actually paid in the Philippines. cIaHDA Such being the case, this Office is of the opinion and so holds that the royalty payments of Wyeth Phils to AHPC and ACC under the License Agreements effective January 1, 2002, shall be subject to tax rate of ten percent (10%), pursuant to the RP-US tax treaty in relation to Article 12(2)(b) of the RP-China tax treaty. (Revenue Memorandum Circular (RMC) No. 46-2002 dated September 2, 2002) ( BIR Ruling No. DA-ITAD 101-03 dated July 24, 2003 ) Moreover, the said royalty payments to be paid by Wyeth Phils to AHPC and ACC in the Philippines are subject to the 10% value-added tax pursuant to Sec. 108 of the Tax Code. Accordingly, Wyeth Phils, being the resident withholding agent and payor in control of the payment shall be responsible for the withholding of the 10% final VAT on such royalty before making any payment to AHPC and ACC. In remitting the VAT withheld, Wyeth Phils shall use 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 documentary substantiation for the claim of input tax by Wyeth Phils upon filing its own VAT return, if it is a VAT-registered taxpayer. In case Wyeth Phils is a non-VAT registered taxpayer, the passed on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset" whichever is applicable. In addition, Wyeth Phils is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of AHPC and ACC, the first three copies thereof to be given to AHPC and ACC and the fourth copy to be retained by Wyeth Phils as its file copy. [ Section 4 & 6, Revenue Regulations (RR) No. 4-2000; Section 3 of RR 8-2002; Section 7 of RR 4-2002 ) This ruling is issued based on 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