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October 26, 2004 ITAD RULING NO. 115-04 Article 13 Philippines-US tax treaty Article 12 Philippines-China tax treaty BIR Ruling No. ITAD 140-03 RMC No. 46-2002 Pfizer, Inc . 23rd Floor Ayala Life FGU Center 6811 Ayala Avenue Makati City 1200 Attention: Mr . Domingo M. Uy Financial Controller Gentlemen : This refers to your application for relief from double taxation dated January 6, 2004, requesting confirmation of your opinion that the royalty payments made by your company, Pfizer, Inc. (PFIZER), to Parke, Davis & Company LLC (Parke Davis) and Warner-Lambert Company LLC (Warner US), are subject to the preferential tax rate of 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 also requested that a tax refund in the amount of Two Million Five Hundred Twenty Four Thousand Nine Hundred Eleven Pesos (P2,524,911.00) be made on the excess withholding taxes on the royalty payments made by PFIZER to Parke Davis and Warner US which were subjected to 15% final withholding tax, pursuant to the same tax treaties. It is represented that Parke Davis and Warner US are nonresident foreign corporations organized and existing under the laws of Michigan and Delaware, United States of America (USA), respectively; that they are not registered either as a corporation or a partnership licensed to do business in the Philippines per certifications issued by the Securities and Exchange Commission (SEC) dated April 15, 2004 and April 21, 2004, respectively; that PFIZER is a corporation organized and existing under the laws of the Philippines and registered under SEC Registration No. 9092; that it is engaged in the manufacture, preparation, purchase or acquisition, ownership, processing, mortgage, sale, pledge or disposal of, distribution, exportation, importation of goods, wares and merchandise and personal property of every kind, including but not limited to chemical, pharmaceutical, medicinal and biological products; that on January 18, 2001, PFIZER and Warner Lambert Philippines, Inc. (Warner Philippines) merged into one company as evidenced by the Certificate of Filing of Amended Articles of Incorporation of PFIZER, the surviving company; that the entire assets and liabilities of Warner Philippines were transferred to and absorbed by the PFIZER. It is further represented that prior to the merger with PFIZER, Warner Philippines entered into a separate Licensing and Technical Assistance Agreements (Agreements) with Parke Davis and Warner US; that the Agreements were registered with the then Bureau of Patents, Trademarks and Technology Transfer under Certificate of Registration (CR) Nos. 1586, 1531 and 1530-A; that the Agreement between Warner US and Warner Philippines, covered by CR No. 1586 concerns the exclusive license to manufacture and sell the licensed products in the territory for the use of patents, trademarks, date, know how, formulation and other assistance, valid for 10 years from April 1, 1994 to March 31, 2004; that the Agreements between Parke Davis and Warner Philippines covering CR No. 1531 and CR No. 1530-A both concern the manufacture and sale of pharmaceutical, health care and confectionary products; that in all of the said Agreements, the following were agreed upon: License Grants Licensor grants to Licensee an exclusive license to manufacture the Licensed Products in the Philippines and, subject to export right, to sell for use or use itself in the Philippines and any other country or countries to which the export of Licensed Products may be made such Licensed Products and parts. SaIHDA xxx xxx xxx Technical Information Licensee shall be entitled to receive data, Know-how, formulations and other assistance as set forth below with respect to the Licensed Products. xxx xxx xxx Technical Assistance During the term of the Agreement, Licensor shall provide and communicate to Licensee all technical assistance required for the satisfactory manufacture of the Licensed Products and marketing of the same. xxx xxx xxx Patents and Trademarks Licensor grants Licensee an exclusive license under the Patents covering the manufacture of the Licensed Products. that in relation, Warner Philippines agreed to pay a royalty based on 5% of its net sales; that in a letter dated August 15, 2003, Carmen G. Peralta, Director, Intellectual Property Office informed Pfizer about the transfer of the Licensing and Technical Assistance Agreements of Warner Philippines to Pfizer; that during the period from January 2002 to December 2002, the royalty payments remitted by PFIZER to Parke Davis and Warner US were subjected to 15%; and that you are of the opinion that PFIZER is entitled to a refund of overpaid withholding taxes on royalty representing the difference between the 15% tax collected and the 10% tax ought to have been remitted pursuant Revenue Memorandum Circular (RMC) No. 46-2002 dated September 2, 2002. In reply, please be informed that Article 13 of the Philippines-United States tax treaty provides as follows, 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. "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 State. "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. STcHEI "xxx xxx xxx" In relation thereto, Article 12 of the Philippines-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. "xxx xxx xxx" Pursuant to the aforequoted "most-favored-nation" clause under Article 13(2)(b)(iii) of the Philippines-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, Article 12(2)(b) of the Philippines-China tax treaty provides that 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. DA-ITAD 140-03 dated September 18, 2003) A plain reading of the Philippines-China tax treaty provisions on the avoidance of the double taxation shows 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. Such being the case, this Office is of the opinion and so holds that the royalty payments of Pfizer to Parke Davis and Warner US under the Licensing and Technical Assistance Agreements shall be subject to the tax rate of ten percent (10%), pursuant to the Philippines-US tax treaty in relation to Article 12(2)(b) of the Philippines-China tax treaty applicable to royalty payments made beginning January 1, 2002 where the Philippines-China tax treaty became effective. (RMC No. 46-2002 dated September 2, 2002 and BIR Ruling No. DA-ITAD 140-03 dated September 18, 2003) Moreover, the said royalty payments to be paid by Pfizer to Parke Davis and Warner US are subject to the 10% value-added tax (VAT) pursuant to Sec. 108 of the Tax Code. Accordingly, Pfizer, 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 Parke Davis and Warner US. In remitting the VAT withheld, Pfizer shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form No. 1600 and the proof of payment thereof shall serve as documentary substantiation for the claim of input tax by Pfizer upon filing its own VAT, if it is a VAT-registered taxpayer. In case Pfizer 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, Pfizer is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate upon request of Parke Davis and Warner US, the first three copies thereof to be given to Parke Davis and Warner US and the fourth copy to be retained by Pfizer as its file copy. [Section 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 and is rendered only for the purpose of determining whether Parke Davis and Warner US are entitled to the benefits of the Philippines-US tax treaty. The determination on whether your request for tax refund should be given due course is upon the Office which will be conducting the investigation for that purpose. Thus, the docket pertaining thereto (including a copy of this ruling) shall be indorsed to the proper Office for processing and investigation. THIcCA Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service