December 18, 2014

ITAD BIR RULING NO. 324-14

Art. 13, Philippines-United States of

America Tax Treaty

Manabat Sanagustin & Co., CPAs

9th Floor, The KPMG Center
6787 Ayala Avenue
1226 Makati City

Attention: Atty. Manuel P. Salvador III

Principal, Tax

Gentlemen :

This refers to your tax treaty relief application filed on October 16, 2012
requesting confirmation that royalties paid by WYETH PHILIPPINES, INC. ("Wyeth
Philippines") to WYETH LLC ("Wyeth") are subject to the preferential rate of 10
percent pursuant to the "most-favored nation" clause under Article 13 of the
Convention between the Government of the Republic of the Philippines and the
Government of the United States of America with Respect to Taxes on Income
("Philippines-US tax treaty") in relation to Article 12 of the Agreement between the
Government of the Republic of the Philippines and the Government of the People's
Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income ("Philippines-China tax treaty").

Facts:

It is represented that Wyeth is a resident of the United States of America and a

resident thereof based on the Certification issued by the Internal Revenue Service,
Philadelphia, PA 19255 on July 9, 2012; that Wyeth is situated at Five Giralda Farms,
Madison, New Jersey, 07940, United States of America; that Wyeth is not registered
as a corporation or partnership in the Philippines as confirmed by the Certification of
Non-Registration of Company issued by the Securities and Exchange Commission on
October 10, 2012; that, on the other hand, Wyeth Philippines is a domestic company
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 situated at 2236 Chino Roces Avenue, Makati City, Philippines and registered with
the Board of Investments as New Producer of Infant Formula as evidenced by the
Certificate of Registration No. 2006-035 dated March 8, 2006.

It is further represented that Wyeth Philippines and Wyeth amended the License
Agreement dated January 1, 2003, on January 1, 2008 replacing Annexes B and D in
their entirety, as follows: HSDaTC

Trademark Names
Trademark Name Description Generic Name

2ND Age Bonamil Powder Follow-on Formula

3m Age Bonakid Powder Follow-on Formula
3m Age Promil Kid Powder Follow-on Formula
Bonakid Powder Infant Formula
Bonakid Preschool Powder Infant Formula
Bonamil Powder Infant Formula
Bonna Powder Infant Formula
Nursoy Powder Infant Formula
Progress Powder Infant Formula
Progress Gold Powder Follow-on Formula
Promil 2ND Age Powder Follow-on Formula
Promil Global Powder Follow-on Formula
Promil Gold Powder Follow-on Formula
Promil Kid Powder Follow-on Formula
Promil LF Powder Follow-on Formula
S-26 Powder Infant Formula
S-26 Gold Powder Infant Formula
S-26 Lactose Free Powder Infant Formula
Auralgan Drops Benzocaine, Antipyrine
Fibrosine Powder Maltodextrin
Iselpin Tablets Sucralfate
Isordil Tablets Isosorbide Dinitrate
Advil Liquid/Suspension Ibuprofen
Advil Children's Liquid/Suspension Ibuprofen
Clusivol Syrup, Hand Caps, Gel Caps, Multivitamin Preparation
Tablets, Pediatric Drops,
Power C Syrup
Dimetapp Syrup Brompheniramine
Maleate, Phenylephrine
Hydrochloride

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 Loviscol Syrup, Capsules Carboceisteine
Polymagma Tablets Attapulgite
Robitussin Syrup, Capsules, Liqui-gels Guaiphenesin
Robitussin DM Syrup Dextromethorphan
Hydrobromiede,
Guaiphenesin, Alcohol
Simeco Tablets Aluminum Hydroxide,
Magnesium Hydroxide,
Simethicone
Royalty Rates
Product Generic Name Royalty Rates

2ND Age Bonamil Follow-on Formula 5.0%

3m Age Bonakid Follow-on Formula 5.0%
3m Age Promil Kid Follow-on Formula 5.0%
Bonakid Infant Formula 5.0%
Bonakid Preschool Infant Formula 5.0%
Bonamil Infant Formula 5.0%
Bonna Infant Formula 5.0%
Nursoy Infant Formula 5.0%
Progress Infant Formula 5.0%
Progress Gold Follow-on Formula 5.0%
Promil 2ND Age Follow-on Formula 5.0%
Promil Global Follow-on Formula 5.0%
Promil Gold Follow-on Formula 5.0%
Promil Kid Follow-on Formula 5.0%
Promil LF Follow-on Formula 5.0%
S-26 Infant Formula 5.0%
S-26 Gold Infant Formula 5.0%
S-26 Lactose Free Infant Formula 5.0%
Auralgan Benzocaine, Antipyrine 2.0%
Fibrosine Maltodextrin 2.0%
Iselpin Sucralfate 2.0%
Isordil Isosorbide Dinitrate 2.0%
Advil Ibuprofen 2.0%
Advil Children's Ibuprofen 2.0%
Clusivol Multivitamin Preparation 2.0%
Dimetapp Brompheniramine Maleate, 2.0%
Phenylephrine Hydrochloride
Loviscol Carboceisteine 2.0%
Polymagma Attapulgite 2.0%
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 Robitussin Guaiphenesin 2.0%
Robitussin DM Dextromethorphan Hydrobromiede, 2.0%
Guaiphenesin, Alcohol
Simeco Aluminum Hydroxide, Magnesium 2.0%
Hydroxide, Simethicone

It is further represented that the Agreement shall commence on January 1,

2008 and shall be effective and binding as to each Product on the date of the initial
commencement of the manufacture of such Product by or on behalf of Wyeth
Philippines, on which date the Agreement shall supersede all other agreements with
respect to the subject matter as such agreements relate to such Product. Said
Agreement shall remain in effect for a period of three (3) years and shall be
automatically renewed for successive one (1)-year periods subjection to the
termination provisions.

It is finally represented that the gains subject of this ruling are not under
investigation, on-going audit, administrative protest, claim for refund or issuance of a
tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn
Statement issued by the Finance Director of Wyeth Philippines on October 10, 2012.

Ruling:

In reply, please be informed that Section 28 (B) (1) of the National Internal
Revenue Code ("Tax Code") of 1997, as amended, provides that the fees paid to
Wyeth, being a foreign corporation not engaged in trade or business in the Philippines,
are subject to income tax in the Philippines at the rate of 30 percent, thus:

"Section 28. Rates of Income Tax on Foreign Corporations. —

xxx xxx xxx

(B) Tax on Nonresident Foreign Corporation. —

(1) In General. — Except as otherwise provided in this Code, a

foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five percent (35%) of
the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital gains,
except capital gains subject to tax under subparagraph 5(c):

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 Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%). DTIACH

xxx xxx xxx"

However, under Section 32 (B) (5) of the Code, such fees may be exempt from
income tax or subject to a reduced rate to the extent required by any treaty obligation
on the Philippines, thus:

"Section 32. Gross Income. —

xxx xxx xxx

(B) Exclusions from Gross Income. — The following items shall not
be included in gross income and shall be exempt from taxation
under this Title:

xxx xxx xxx

(5) Income Exempt under Treaty. — Income of any kind, to

the extent required by any treaty obligation binding upon
the Government of the Philippines.

xxx xxx xxx"

Paragraphs 1, 2 and 3, Article 13 of the Philippines-US tax treaty, provide:

"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,

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 (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. EIDATc

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. (underlining supplied)

xxx xxx xxx"

Paragraph 2 (b) (iii) above provides that royalties arising in the Philippines and
derived by a resident of the United States shall be subject to the lowest rate of
Philippine income tax that may be imposed on royalties of the same kind paid under
similar circumstances to a resident of a third State (commonly known as the
most-favored-nation tax treatment of royalties). The Supreme Court in Commissioner
of Internal Revenue vs. S.C. Johnson and Son, Inc. and Court of Appeals (G.R. No.
127105 dated June 25, 1999) has cited two conditions for royalties arising in the
Philippines and derived by a resident of another country (in this case, the United
States) to be qualified for a most-favored-nation tax treatment. First, the royalties in
question derived by a resident of the other country (the United States) must be of the
same kind as those derived by a resident of the third country which are subject to the
most-favored-nation tax treatment under the existing tax treaty between the
Philippines and the third country. Second, the mechanism employed by the other
country (the United States) in mitigating the effects of double taxation of
foreign-sourced income derived by its residents must be the same with that employed
by the third country, which can be determined by taking into account and comparing
the respective articles on Elimination of Double Taxation of the other country (the
United States) and the third country under their respective tax treaties with the
Philippines.

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 In looking for a third country which grants a most-favored-nation tax treatment
on royalties, you cited the People's Republic of China, particularly, the Agreement
between the Government of the Republic of the Philippines and the Government of the
People's Republic of China for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income (Philippines-China tax treaty)
which entered into force on March 23, 2001, and whose provisions on taxes apply on
income derived or which accrued beginning January 1, 2002. Article 12 of this tax
treaty provides:

"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 AICHaS

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.

For as long as the transfer of technology, under Philippine law, is subject

to approval, the limitation of the tax rate mentioned under (b) shall, in
the case of royalties arising in the Republic of the Philippines, only
apply if the contract giving rise to such royalties has been approved by
the Philippine competent authorities.

xxx xxx xxx"

According to paragraph 2, royalties arising in the Philippines and derived by a

resident of the People's Republic of China are subject to income tax at the rate of (a)
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 15 percent of the gross amount of the royalties for royalties arising from the use of, or
the right to use, any copyright of cinematograph films, and films or tapes for
television or radio broadcasting, or (b) 10 percent of the gross amount of the royalties
arising from the use of, or the right to use, any copyright of literary, artistic or
scientific work (except those for cinematograph films, and films or tapes for
television or radio broadcasting), 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.

Applying the Philippines-China tax treaty, the royalty fee to be paid by Wyeth
Philippines to Wyeth for the use of the licenses, may be subject to 10 percent based on
the gross amount thereof, provided the two conditions for the most-favored-nation tax
treatment of royalties (as described above) are both satisfied.

On whether the first condition is satisfied, we note that under paragraph 3,

Article 13 of the Philippines-US tax treaty quoted below, payments received as a
consideration for the use or the right to use of patents, information concerning
industrial, commercial or scientific experience (know-how), and copyright of literary,
artistic or scientific work to which the royalty fee for the use or the right to use of the
Licensed Patents, Licensed Trademark and Technical Information are assimilated,
respectively, are all considered royalties, thus:

"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." TDSICH

In the same manner, although lacking a separate paragraph for the definition of
royalties in its article, paragraph 2 (a), Article 12 of the Philippines-China tax treaty,
as quoted above, provides that royalties arising from the use or the right to use of
patents, information concerning industrial, commercial or scientific experience
(know-how), and copyright of literary, artistic or scientific work, among others, are
subject to income tax rate of 10 percent of the gross amount thereof. This being the
case, the first condition for the most-favored-nation tax treatment of royalties is
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 satisfied, which requires the royalties derived by a resident of the US must be of the
same kind as those derived by a resident of China.

As to the second condition, under paragraph 1, Article 23 of the

Philippines-US tax treaty below, the mechanism employed in mitigating the effects of
double taxation of income from foreign source is the ordinary credit method. It
provides:

"Article 23

Relief from Double Taxation

Double taxation of income shall be avoided in the following manner:

1. In accordance with the provisions and subject to the limitations of the

law of the United States (as it may be amended from time to time
without changing the general principle hereof), the United States shall
allow to a citizen or resident of the United States as a credit against the
United States tax the appropriate amount of taxes paid or accrued to the
Philippines and, in the case of a United States corporation owning at
least 10 percent of the voting stock of a Philippine corporation from
which it receives dividends in any taxable year, shall allow credit for the
appropriate amount of taxes paid or accrued to the Philippines by the
Philippine corporation paying such dividends with respect to the profits
out of which such dividends are paid. Such appropriate amount shall be
based upon the amount of tax paid or accrued to the Philippines, but the
credit shall not exceed the limitations (for the purpose of limiting the
credit to the United States tax on income from sources within the
Philippines or on income from sources outside the United States)
provided by United States law for the taxable year. For the purpose of
applying the United States credit in relation to taxes paid or accrued to
the Philippines, the rules set forth in Article 4 (Source of Income) shall
be applied to determine the source of income. For purposes of applying
the United States credit in relation to taxes paid or accrued to the
Philippines, the taxes referred to in paragraphs 1(b) and 2 of Article 1
(Taxes Covered) shall be considered to be income taxes. EDSHcT

xxx xxx xxx"

Under the ordinary credit method, the US (as country of residence) would limit
a taxpayer's allowable tax credit to that portion of the taxpayer's tax liability in the US
that is attributable to the income that is taxed in the Philippines (the country of source
or country of situs). As a result of this limitation, if the Philippines has an effective
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 tax rate that exceeds the effective tax rate of the US on a particular income, the US
would not grant the taxpayer a full credit for the income tax imposed by the
Philippines on such income.

In the same manner, under paragraph 1, Article 23 of the Philippines-China tax

treaty below, it can be seen that that ordinary credit method is also employed by
China as a mechanism for mitigating the effects of double taxation of income derived
by its residents from foreign sources, thus:

"Article 23

Methods for the Elimination of Double Taxation

1. In China, double taxation shall be eliminated as follows:

Where a resident of China derives income from the Philippines the

amount of tax on that income payable in the Philippines in accordance
with the provisions of this Agreement, may be credited against the
Chinese tax imposed on that resident. The amount of the credit,
however, shall not exceed the amount of the Chinese tax on that income
computed in accordance with the taxation laws and regulations of China.

2. In the Philippines, double taxation shall be eliminated as follows:

Subject to the laws of the Philippines and the limitations thereof

regarding the allowance of a credit against Philippine tax of tax payable
in any country other than the Philippines. Chinese tax payable in respect
of income derived from China shall be allowed as credit against the
Philippine tax payable in respect of that income.

xxx xxx xxx"

This being the case, the second condition for the most-favored-nation tax
treatment of royalties, which requires that the mechanism employed by the US in
mitigating the effects of double taxation of income derived by its residents from
foreign sources must be the same with that employed by China, is also satisfied.

In fine, by reason that all the conditions for the most-favored-nation tax
treatment of royalties laid down by the Supreme Court in the S.C. Johnson case are
satisfied, royalty fees to be paid by Wyeth Philippines to Wyeth for the use of the
licenses granted, is subject to 10 percent income tax based on the gross amount
thereof. aSDHCT

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 Finally, the royalties payable to Wyeth are subject to value-added tax ("VAT")
under Section 106 of the Tax Code, as amended, provides:

"SEC. 106. Value-added Tax on Sale of Goods or Properties. —

(A) Rate and Base of Tax. 1(1) — There shall be levied, assessed and
collected on every sale, barter or exchange of goods or properties, a
value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor: Provided, That
the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been
satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic

Product (GDP) of the previous year exceeds two and four-fifth
percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the

previous year exceeds one and one-half percent (1 1/2%).

(1) The term 'goods' or 'properties' shall mean all tangible

and intangible objects which are capable of pecuniary
estimation and shall include:

(a) Real properties held primarily for sale to

customers or held for lease in the ordinary course
of trade or business;

(b) The right or the privilege to use patent, copyright,

design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right;

xxx xxx xxx"

With regard to the procedures for the withholding and payment of VAT, Wyeth
Philippines shall withhold VAT on the royalties at the rate of 12 percent before
remitting them to Wyeth. In remitting to the Bureau of Internal Revenue the VAT
withheld, Wyeth Philippines shall use BIR Form No. 1600 (Monthly Remittance
Return of VAT and Other Percentage Taxes Withheld). In addition, Wyeth
Philippines is required to issue in quadruplicate the Certificate of Final Tax Withheld
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 at Source (BIR Form No. 2306), the first three copies for Wyeth and the fourth copy
for Wyeth Philippines as its file copy. 2(2) SECcAI

This ruling is issued on the basis of the facts as represented. However, if upon
investigation it shall be disclosed that the actual facts are different, then this ruling
shall be without force and effect insofar as the herein parties are concerned.

Very truly yours,

(SGD.) KIM S. JACINTO-HENARES

Commissioner
Bureau of Internal Revenue
Footnotes
1. The increase in the VAT rate to 12 percent beginning February 1, 2006, pursuant to
the Provisions of Republic Act No. 9337, was announced in Revenue Memorandum
Circular No. 7-06 (January 31, 2006).
2. Pursuant to Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax
Regulations of 2005), as amended.

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 Endnotes

1 (Popup - Popup)
1. The increase in the VAT rate to 12 percent beginning February 1, 2006, pursuant to
the Provisions of Republic Act No. 9337, was announced in Revenue Memorandum
Circular No. 7-06 (January 31, 2006).

2 (Popup - Popup)
2. Pursuant to Revenue Regulations No. 16-2005 (Consolidated Value-Added Tax
Regulations of 2005), as amended.

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