ITAD Ruling No. 114-03

August 1, 2003 ITAD RULING NO. 114-03 Art. 12, RP-France BIR Ruling No. DA-ITAD 73-03 Romulo Mabanta Buenaventura Sayoc & Delos Angeles Law Office 30th Flr., Citibank Tower, Citibank Plaza 8741 Paseo de Roxas, Makati City Attention: Atty. Priscilla B. VaIer Gentlemen : This refers to your letter dated May 23, 2003 requesting for confirmation of your opinion that the royalties payable by Sanofi-Synthelabo Philippines, Inc. (SSPI) to Sanofi-Synthelabo S.A. (SSSA) under the five (5) Trademark License Agreements are subject to 15% preferential tax rate pursuant to Article 12 of the RP-France tax treaty as amended by Article 6 of the Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of France dated January 9, 1976. It is represented that Sanofi-Synthelabo S.A. (SSSA) (formerly Elf Sanofi, Sanofi, and Sanofi Pharma) is a corporation duly organized under the laws of France and with principal address at #174 Avenue de France Paris-Cedex, France; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines as evidenced by the Certificate of Non-Registration issued by the Securities and Exchange Commission dated March 5, 2002; that Sanofi-Synthelabo Philippines, Inc. (SSPI) (formerly Sterling Ethical Products, Inc. and subsequently Sanofi Winthrop Inc.,) is a domestic corporation duly organized under the laws of the Philippines with principal address located at 3rd Floor Feliza Building, 108 Herrera St, Legaspi Village, Makati City; that SSSA and SSPI entered into five (5) separate Trademark License Agreements enumerated as follows: 1) Trademark License Agreement dated June 9, 1993 between Sterling Ethical Products Inc. (now SSPI) and Elf Sanofi, (now SSSA) covered by BPTTT Certificate of Registration No. 1868. 2) Trademark License Agreement dated June 9, 1993 between Sterling Ethical Products Inc. (now SSPI) and Sanofi Pharma (now SSSA) covered by BPTTT Certificate of Registration No. 1869. 3) Trademark License Agreement dated November 30, 1993 between Sanofi Winthrop Inc. (Philippines) (now SSPI) and Sanofi (now SSSA) covered by BPTTT Certificate of Registration No. 1883. 4) Trademark License Agreement dated November 30, 1993 between Sanofi Winthrop Inc. (Philippines) (now SSPI) and Sanofi (now SSSA) covered by BPTTT Certificate of Registration No. 1884. 5) Trademark License Agreement dated November 30, 1993 between Sanofi Winthrop Inc. (Philippines) (now SSPI) and Sanofi (now SSSA) covered by BPTTT Certificate of Registration No. 1885. that SSSA (Licensor) grants SSPI (Licensee) an exclusive license to use the Licensed Marks in the Philippines under and during the term of the respective agreements in connection with the manufacturing, marketing, sale and distribution of pharmaceutical products for and in consideration of a royalty of three (3%) percent of the actual net sales proceeds per agreement. In reply, please be informed that Article 12 of the RP-France tax treaty provides, viz : TIaCcD "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 be taxed in the Contracting State in which they arise, and according to the law of that State. However, the tax so charged shall, provided that the royalties are taxable in the other Contracting State, not exceed: a) in the case of the Philippines, 15 per cent of the gross amount of the royalties (i) paid by an enterprise registered with the Philippines Board of Investments and engaged in preferred areas of activities, or (ii) paid in respect of cinematographic films or of works recorded for broadcasting or television; b) in all other cases, 25 per cent of the gross amount of the royalties. "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 and works recorded for broadcasting or television, 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" However, Article 6 of the Protocol provides: "Article 6 "Paragraph 2 of Article 12 of the Convention is deleted and replaced by the following: "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 beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 15 percent of the gross amount of the royalties." In view thereof, your opinion that the royalty payments made by SSPI to SSSA are subject to 15% preferential tax rate of the gross amount of the royalties is hereby confirmed. ( BIR Ruling No. DA-ITAD 73-03 dated May 27, 2003 ) Moreover, the royalty payments by SSPI for the exclusive license provided by SSSA in the Philippines are subject to 10% value-added tax pursuant to Section 108 of the Tax Code. Accordingly, SSPI, being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT before making any payment to SSSA. In remitting the VAT withheld, SSPI 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 SSPI upon filing its own VAT, if it is a VAT-registered taxpayer. In case SSPI 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, SSPI is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of SSSA, the first three copies thereof to be given to SSSA and the fourth copy to be retained by SSPI as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2000; 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service