March 9, 2004

ITAD RULING NO. 021-04

Articles 5 & 7,
Philippines-Singapore tax treaty
Sections 57 & 113, Tax Code of
1997
Revenue Regulations No. 7-95
BIR Ruling No. ITAD-182-00
BIR Ruling No. ITAD-29-02

Joaquin Cunanan & Co.

29th Floor Philamlife Tower
8767 Paseo de Roxas
1226 Makati City

Attention: Mary Assumption S. Bautista-Villareal

Principal, Tax Services

Gentlemen :

This refers to your application for relief from double taxation dated August
15, 2002, on behalf of your client, JOHNSON & JOHNSON PTE Limited (JJS),
requesting confirmation of your opinion on the following, pursuant to the
Philippines-Singapore tax treaty:

"1) JJS has no permanent establishment in the Philippines.

"2) Since JJS will have no permanent establishment in the

Philippines, it will not be subject to Philippine income tax on business
profits or income derived from sale of goods in the Philippines and
consequently to 32% withholding tax under Section 28(B) of the Tax Code
of 1997; neither is it subject to 15% profit remittance tax.

"3) JJS will not be subject to withholding tax under Section 57 of

the Tax Code including creditable 1% withholding tax on income payments
made by the top 5,000 corporations to their local suppliers of goods because
JJS is not subject to Philippine income tax.

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 "4) JJS will not be required to withhold 1% creditable withholding
tax when making payments to local suppliers of raw and packing materials
because it has no permanent establishment in the Philippines.

"5) JJPI (i.e., JOHNSON and JOHNSON PHILS., INC.) will not
be subject to creditable withholding tax on sale of goods belonging to JJS
because it merely sells goods as independent agent.

"6) JJS will be allowed to register as a separate VAT entity and be

issued its own TIN/VAT Number.

"7) JJS will be allowed to issue duly registered sales or commercial

invoices for sales made to Philippine customers and that such invoices shall
bear the name of JJPI but using JJS' VAT/TIN Number.

"8) JJS can authorize JJPI as independent agent, to issue JJS' VAT
invoices to Philippine customers and to file VAT returns and pay the VAT
due on the sales to local customers on behalf of JJS.

"9) JJS' VAT invoices issued by JJPI will give rise to an output tax
on the part of JJS and input tax credit in the hands of the Philippine
customers.

"10) JJS will be allowed to offset against its output tax, input VAT
for payments made to third party manufacturing service providers, suppliers
of finished goods, and on importation of raw materials and finished goods
into the Philippines.

It is represented that JJS is a corporation organized and existing under the

laws of Singapore with principal place of business in Singapore; that it is not
registered either as a corporation or as a partnership as evidenced by a Certificate
of Non-Registration issued by the Securities and Exchange Commission dated
December 30, 2003; that it is a resident of Singapore and is a wholly owned
subsidiary of Johnson & Johnson, a United States multinational corporation
(JJUS); that JJUS, has many subsidiaries around the world; that the principal
activities of the group are research, development, manufacture and sale of certain
healthcare and consumer products; that in 1998, the Johnson & Johnson consumer
products group announced that it was undertaking a major review of its worldwide
business operations and management structure; that since then, the group has
begun implementing this restructuring in several regions of the world and has
started reviewing its operating arrangements in the Asia Pacific Region; that the
review is designed to: (1) improve cost structure to deliver superior value to
customers, (2) reduce introduction time for new or improved products, (3)
integrate the sourcing strategies with research & development activities and
marketing strategies, and (4) allow the local affiliates to concentrate on customers

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 and consumers; that on a global basis, the group is organized on the principles of
decentralized management; that the parent company, JJUS, establishes certain
worldwide standards and objectives, and its international subsidiaries generally act
autonomously to implement the overall strategies to the extent economically viable
in the local market; that what is changing is that most of the entrepreneurial
functions and risks currently borne by local affiliates are being transferred to
regional entities for better management of their exposures; that in the Asia Pacific
Region, JJS will be the regional entrepreneur and will be the owner and/or licensor
of the manufacturing rights, trademarks, patents, technical know-how and the legal
owner of all imported and locally produced goods; that in this capacity, JJS
assumes the risks, loss and profit arising or derived from the distribution of the
products in the region; that for consumer products, it will enter into manufacturing
agreements with independent third party manufacturers as well as related
parties-manufacturers; that JJS will sell and distribute its products in each country
in the region through an independent agent; that in the Philippines, Johnson and
Johnson Philippines, Inc. (JJPI), a corporation organized and existing under
Philippine laws with principal place of business at Edison Rd., Barrio Ibayo,
Parañaque City, will act as the independent agent of JJS; that JJPI will assist JJS
with the introduction of and marketing of the products in the Philippine market as
well as to assist with the roll out of marketing programs and strategies developed
and approved by JJS; that JJPI will have the sole discretion in choosing its own
operational marketing activities although it may consult JJS and will be
responsible for the day-to-day identification and management of local marketing
initiatives; and that the following would be the flow of transaction in the
Philippines: IcCEDA

"JJS will export to the Philippines, finished products and raw

materials for manufacture into finished goods by third party full service and
toll manufacturers. It will likewise acquire finished goods from local
suppliers in the Philippines. These finished goods will be sold and
distributed to the Philippine customers with the assistance of an independent
agent. JJS shall retain ownership of the goods manufactured by independent
local third party toll manufacturers (Independent Manufacturers) and the
finished goods it exported to the independent agent until they are sold by the
latter."

It is further represented that JJS will have ultimate control and

responsibility for the marketing and promotion of the products it distributes in the
region; that in this regard, JJS will have all legal rights in respect of the marketing
and related tangible assets associated with the products it distributes in the
Philippines, such as trademarks and trade names; that JJS will also bear all of the
economic and commercial responsibilities and risks associated with the
development and maintenance of the above stated marketing assets for all products

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 it distributes in the Philippines; that a service provider agreement will be entered
into between JJS and JJPI wherein, JJPI will be responsible for selling and
distributing the products of JJS in the Philippines in its own name but for the
account and risk of JJS; that JJPI will sell JJS' goods in its capacity as
consignee-independent agent; that as such, JJPI will act as principal in the
transaction covering the sale of the goods but it will not have legal title over the
goods, ownership of which remain with JJS until these are sold to the customers of
JJPI; that JJPI will have no power nor authority to legally bind JJS since the
customers will transact business with JJPI only and not with JJS regarding the
goods that they purchase; that JJPI shall assume all the obligations and warranties
of a seller; and that any and all claims, whether from tort or contract, arising from
the buyer's purchase of goods shall be filed solely against JJPI; that the customers
will pay JJPI but JJPI will account for the proceeds of sale and remit the same less
expenses to JJS; that JJPI will maintain separate books of accounts for the sale of
JJS' goods in the Philippines; that for the services rendered by JJPI, JJS will pay
JJPI an arm's length service fee which shall be derived, evaluated, and supported
having regard to all relevant transfer pricing guidelines promulgated by the
Organization for Economic Co-operation and Development (OECD); that JJPI, as
an independent agent, has no exclusive contract with JJS and can enter into similar
arrangements with third parties in the pursuit of its ordinary course of business;
that JJS will register as a separate VAT entity and secure its own Tax
Identification Number (TIN)/VAT number; that the sales of its goods in the
Philippines shall be covered by its own invoice which shall be issued by JJPI in its
capacity as independent agent; that since JJPI acts as the principal in the sale, JJS'
invoice shall bear the name of JJPI but using JJS' own TIN/VAT Number; that JJS
shall pay the 10% VAT on the sales of its goods to local customers; that JJPI, as
independent agent, shall be authorized to prepare and file JJS' monthly and
quarterly VAT returns and pay the corresponding tax; that it is proposed that a
request for accreditation of JJS as the importer/consignee of record of the raw
materials and finished goods sent to the Philippines will be submitted to the
Bureau of Customs; that as importer/consignee of record, JJS, through JJPI, will
settle all customs duties, and VAT upon importation of the raw materials and
finished goods sent to the Philippines; that JJPI will then deliver the raw materials
to independent local third party toll manufacturers of JJS for processing into
finished goods; that the Independent Manufacturers (IMs) are local companies that
own their plants and manufacturing facilities and are not in any way related to JJS
or JJPI; that they have sole discretion to make day to day decision and are not in
any way related to the manufacturing processes and methods subject to the
standards and quality required by JJS; after the products are manufactured, the IMs
will safekeep the products only for such period of time necessary for JJS to
conduct final quality control test on the finished goods, they will be delivered to or
withdrawn by JJPI for sale to customers; that the said IMs will be paid service or

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 tolling fees on an arm's length basis; that in the Philippines, the group plans to
establish a regional operating headquarters (ROHQ) which will render certain
services to Johnson & Johnson companies operating for the Asia Pacific Region;
that this ROHQ will render certain services for JJS and, product development
services for JJUS; and that the ROHQ will generate employment in the Philippines
and earn foreign exchange for services rendered to affiliates in the Asia Pacific
Region.

In reply, please be informed as follows:

INCOME TAX ASPECT

Articles 5 and 7 of the Philippines-Singapore tax treaty provides as follows,

viz:

"Article 5

PERMANENT ESTABLISHMENT

"1. For the purposes of this Convention, the term 'permanent

establishment' means a fixed place of business in which the business of the
enterprise is wholly or partly carried on.

"2. The term 'permanent establishment' includes specially but is not

limited to:

a) A seat of management;

b) A branch;

c) An office;

d) A store or other sales outlet;

e) A factory;

f) A workshop;

g) A warehouse, in relation to a person providing storage

facilities for others;

h) A mine, quarry, or other place of extraction of natural

resources;

i) A building site or construction or assembly project or

installation project or supervisory activities in connection therewith,
provided such site, project or, activity continues for a period more
than 183 days; and
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 j) The furnishing of services, including consultancy
services, by a resident of one of the Contracting States through
employees or other personnel, provided activities of that nature
continue (for the same or a connected project) within the other
Contracting State for a period or periods aggregating more than 183
days.

xxx xxx xxx

"4. A person acting in one of the Contracting States on behalf of an

enterprise of the other Contracting State, other than an agent of an
independent status to whom paragraph 5 applies, shall be deemed to be a
permanent establishment in the first-mentioned Contracting State if —

a) he has, and habitually exercises in the first-mentioned

Contracting State, an authority to conclude contracts in the name of
that enterprise unless the exercise of such authority is limited to the
purchase of goods or merchandise for that enterprise; or

b) he has no such authority, but habitually maintains in the

first-mentioned State a stock of goods or merchandise from which he
regularly delivers goods or merchandise on behalf of the enterprise.

"5. An enterprise of one of the Contracting States shall not be

deemed to have a permanent establishment in the other Contracting State
merely because that enterprise carries on business in that other Contracting
State through a broker, general commission agent, or any other agent of an
independent status, where such broker or agent is acting in the ordinary
course of his business. However, when the activities of such an agent are
devoted wholly or almost wholly on behalf of that enterprise, he shall not be
considered an agent of independent status within the meaning of this
paragraph if the transactions between the agent and the enterprise were not
made under arm's length conditions.

"xxx xxx xxx."

"Article 7

"BUSINESS PROFITS

"1. The profits of an enterprise of a Contracting State shall be

taxable only in that State unless the enterprise carries on business in the
other Contracting State through a permanent establishment situated therein.
If the enterprise carries on or has carried on business as aforesaid, the profits
of the enterprise may be taxed in the other State but only so much of them as
is attributable to that permanent establishment.

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 "xxx xxx xxx"

Under the aforequoted provisions, business profits of JJS shall only be

taxable in the Philippines if it has a permanent establishment situated therein. For
purposes of paragraph 4(a) of Article 5, neither the IMs of JJS nor JJPI has the
authority to conclude contracts in the name of JJS. As a toll manufacturer, the said
IMs will process raw and packing materials belonging to JJS. However, it is JJS
rather than the IMs, which will be responsible for the negotiation and the strategic
purchases of the raw and packing materials. On the other hand, a critical feature of
JJPI is its inability to contractually bind JJS. JJPI will sell the goods in its capacity
as consignee-independent agent and will invoice the customers in its own name
pursuant to its status as an independent agent. It will have no ability to conclude
contracts with customers in the name of, or on behalf of, JJS. Neither the IMs nor
JJPI, both in the Philippines, habitually maintains a stock of goods or merchandise
from which either the IMs or JJPI may regularly deliver goods or merchandise on
behalf of JJS pursuant to Article 5(4)(b). CDTHSI

Furthermore, nothing in the foregoing facts as represented will show that

JJS will establish a permanent establishment in the Philippines. If a permanent
establishment will be established in the Philippines, the profits of the Singapore
entity like JJS may be taxed in the Philippines but only so much of them as are
attributable to the permanent establishment. While JJS will enter into an agreement
relating to the provision of toll processing and other services with IMs and will
also enter into a commissionaire agreement with JJPI, they will not constitute a
permanent establishment since the IMs and JJPI will have a separate and distinct
personality from JJS and their activities will not be devoted wholly or almost
wholly to JJS and will be done in the ordinary course of their business under arm's
length conditions.

For purposes of Article 5 (5), the IMs and JJPI are not dependent agents of
JJS. Rather, they are independent entities that merely provide services to JJS in
return for arm's length consideration, acting in the ordinary course of their trades
or businesses for which the IMs and JJPI cannot be considered as a permanent
establishment of JJS. The IMs have the freedom and autonomy to carry out their
business operations without any immediate interference or control from JJS. Also,
the processing arrangement of the IMs with JJS is non-exclusive. The IMs remain
free to contract with other parties as long as they do not transmit or use the
technology, formulas, processes, standards or know-how for the processing of
goods owned by them (IMs) or third parties. The same holds true for JJPI as it will
independently undertake its operations in the manner it determines and will be able
to provide similar services to third parties and engage in other activities for
financial gain.

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 The independent status of the IMs and JJPI is likewise supported by the fact
as represented that their respective transactions with JJS will be compensated on
arm's length basis.

With the payment of arm's length service fees, neither the IMs nor JJPI
cannot be considered a permanent establishment of JJS. For this purpose, JJS will
commission independent experts to undertake transfer pricing studies to identify
the market rates paid for comparable services by independent parties dealing at
arm's length, in the context of the same facts and circumstances.

Moreover, if JJS will have no permanent establishment in the Philippines,

then the business profits to be derived by JJS, in particular, the income from the
sale of goods to customers in the Philippines, should not be subject to Philippine
income tax and should be subject to tax only in Singapore. However, all income
derived from the Philippines by the IMs and JJPI will be subject to Philippine
income tax.

Under Section 57 of the Tax Code, the income tax imposed under the Tax
Code shall be withheld by the payor-corporation and/or person. Implementing this
provision, Revenue Regulations (RR) No. 2-98 dated April 17, 1998, provides,
among others, that income payments made by any of the top five thousand (5,000)
corporations, as determined by the Commissioner, to their local supplier of goods
shall be subject to a 1% creditable withholding tax. (Sec. 2.57.2(M) of RR No.
2-98) However, Sec. 2.57.5(B) of the same Regulations provides that the
withholding of creditable withholding tax prescribed therein shall not apply to
income payments made to persons enjoying exemption from payment of income
taxes pursuant to the provisions of any law, general or special.

Since JJS does not have a permanent establishment in the Philippines and
will not be subject to tax on the business profits it derives from the sale of goods to
the customers in the Philippines, it follows that the payments to JJS should not be
subject to any withholding tax under Section 57 of the Tax Code, including the 1%
creditable tax to be withheld on income payments made by any of the top 5,000
corporations to their local supplier of goods.

For the same reason that it does not have a permanent establishment in the
Philippines, JJS should not be required to withhold the same tax (1% creditable
withholding tax) when making payments to local suppliers of raw and packing
materials. Likewise, JJPI should not be subject to the creditable withholding tax on
the sale of goods belonging to JJS because it merely sells as an independent agent.

In fine, your opinion that JJS will not have a permanent establishment in the
Philippines pursuant to Articles 5 and 7 of the Philippines-Singapore tax treaty and

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 will not be subject to Philippine income tax on the business profits or income to be
derived on the sale of goods to customers in the Philippines and that JJS will not
be subject to the 1% creditable withholding tax on the sale of goods to customers
in the Philippines, and JJS will also not be required to withhold the same tax on
payments to local suppliers of raw and packing materials, is hereby confirmed.
(BIR Ruling No. ITAD-182-00 dated December 6, 2000)

VALUE-ADDED TAX ASPECT (including the issuance of a Tax Identification

Number)

1. While JJS is not subject to Philippine income tax, it remains subject to

value-added tax.

The Philippines-Singapore tax treaty only covers elimination of double

taxation with respect to taxes on income (Article 2, Taxes Covered). Under the
National Internal Revenue Code (Tax Code) of 1997, value-added tax (VAT) is
not an income tax but a form of sales tax, a tax imposed on consumption levied on
the sale or supply of goods and services in the Philippines and on imports of goods
into the Philippines. As opposed to income tax which is a direct tax, VAT is an
indirect tax such that the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of goods, properties or services. Therefore, and since JJS sells
its goods in the Philippines in the course of its trade or business, it shall be subject
to VAT equivalent to 10% of the gross selling price of the subject goods sold to
customers in the Philippines (Sections 105 & 106, Tax Code of 1997).

While the taxpayer's profits are derived from the conduct of a trade or
business in the Philippines, which thus makes it subject to VAT, the manner in
which such business is conducted does not give rise to a permanent establishment
as the term is described in the treaty, and as earlier elaborated in BIR Ruling No.
ITAD-182-00 dated December 6, 2000. The determination of whether a taxpayer
is subject to income tax, on one hand, or VAT, on the other, is grounded on
different principles, in this case, one contained in a tax treaty, an international
agreement, and the other, in the Tax Code, which is a law of domestic origin.
Thus, this Bureau has held several times in the past that a taxpayer may be subject
to VAT even if its activities do not give rise to a permanent establishment in the
Philippines. Accordingly, JJS shall be required to secure a Tax Identification
Number (TIN) and register as a VAT taxpayer, but nonetheless remains a
non-resident foreign corporation without a permanent establishment in the
Philippines. The issuance of a TIN to a non-resident foreign person/corporation is
not conclusive as to the presence of a "permanent establishment" in such
Contracting State as defined under Article 5 of the Philippines-Singapore tax
treaty.

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 In this regard, Section 4.107-1 of Revenue Regulations No. 7-95
(Consolidated Value-Added Tax Regulations), in implementing Section 113 and
236 of the Tax Code of 1997, provides that any person who sells, barters,
exchanges, leases goods or properties and renders services subject to VAT is
required to secure a Taxpayer Identification Number (TIN) and register as a VAT
taxpayer. (BIR Ruling No. ITAD-29-02 dated March 14, 2002)

2. JJS is required to issue duly registered receipts or sales or

commercial invoices for every sale or lease of goods or properties or services,
BUT ONLY IN ITS OWN NAME.

Section 113 of the Tax Code of 1997 provides as follows, to wit:

"SEC 113. Invoicing and Accounting Requirements for

VAT-Registered Persons. —

"(A) Invoicing Requirements. — A VAT-registered person shall, for

every sale, issue an invoice or receipt. In addition to the information
required under Section 237, the following information shall be indicated in
the invoice or receipt:

"(1) A statement that the seller is a VAT-registered person, followed

by his taxpayer's identification number (TIN); and

"(2) The total amount which the purchaser pays or is obligated to

pay to the seller with the indication that such amount includes the
value-added tax.

Section 4.108-1 of the above Consolidated Value-Added Tax Regulations

provides as follows:

"Section 4.105-1. Invoicing Requirements — All VAT registered

persons shall, for every sale or lease of goods or properties or services, issue
duly registered receipts or sales or commercial invoices which must show:

1. the name, TIN and address of seller;

2. date of transaction;

3. quantity, unit cost and description of merchandise or nature of

service;

4. the name, TIN business style, if any, and address of the

VAT-registered purchaser, customer or client;

5. the word 'zero rated' imprinted on the invoice covering

zero-rated sales; and
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 6. the invoice value or consideration. TEHIaD

xxx xxx xxx"

Based on the aforecited provisions, a corporation liable to pay VAT is

required to register as a VAT taxpayer and issue duly registered receipts or sales or
commercial invoices to evidence the sale of its goods in the Philippines. Hence, as
a registered VAT taxpayer, JJS is required to issue its duly registered receipts or
sales or commercial invoices for every sale or lease of goods or properties or
services to its Philippine customers (BIR Ruling No. ITAD-29-02 dated March 14,
2002).

It must be emphasized, however, that the law requires, among others, that
the invoice states that the seller is a VAT-registered person which must be
"followed by his" TIN (Also refer to 3rd par. of Section 4.108-1, RR 7-95), since
the "(u)se of TIN other than that assigned to the taxpayer" may expose the violator
to criminal responsibility under Section 8 of RR 11-99. Thus, JJS, as a
VAT-registered person, shall not be allowed to issue its invoices bearing the name
of JJPI using JJS' TIN.

3. JJS may authorize JJPI to issue JJS' invoices to Philippine customers,

file VAT returns and pay the VAT due of JJS.

As already stated, JJS will issue its own official invoice to evidence its sale
in the Philippines and pay the corresponding VAT. However, since JJS does not
maintain an office in the Philippines, by a contract of agency, JJS may constitute
JJPI as its local agent who shall be responsible for the issuance of official receipts
of JJS to its Philippine customers and for the filing and payment of the
corresponding VAT of JJS' sale of goods in the Philippines. For this purpose, JJPI
must maintain separate books of accounts for the sale of JJS' goods in the
Philippines (BIR Ruling No. ITAD-29-02 dated March 14, 2002).

Please be reminded, however, that JJPI, in filing the VAT returns for and on
behalf of JJS, must state that it is so filing on behalf of JJS indicating JJS' TIN for
the latter's proper identification for tax purposes [Section 236(J), Tax Code of
1997]

4. JJS' VAT invoices issued by JJPI will give rise to an output tax on the
part of JJS and input tax credit in the hands of the Philippine customers.

JJS will be allowed to offset against its output tax, input VAT for payments
made to third party manufacturing service providers, suppliers of finished goods,
and on importation of raw materials and finished goods into the Philippines

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 Section 4.104-1 of RR 7-95 provides, viz:

"SEC. 4.104-1. Credits for input tax. — 'Input tax' means the
value-added tax due from or paid by a VAT-registered person on
importation of goods or local purchases of goods or services, including lease
or use of property, from another VAT-registered person in the course of his
trade or business. It shall also include the transitional or presumptive input
tax determined in accordance with Section 105 of the Code.

"It includes input taxes which can be directly attributed to

transactions subject to the value-added tax plus a ratable portion of any input
tax which cannot be directly attributed to either the taxable or exempt
activity.

Any input tax evidenced by a VAT invoice or official receipt issued

by a VAT-registered person in accordance with Section 108 (now Section
113) of the Code, on the following transactions, shall be creditable against
the output tax:

"xxx xxx xxx."

Furthermore, Section 4.104-2 of RR 7-95 provides, viz:

"SEC. 4.104-2. Persons who can avail of the input tax credit. —
The input tax credit on purchase of goods or properties or services shall be
creditable:

"(a) To the purchaser of the domestic goods or properties upon

consummation of the sale and on the importation of said goods or properties.

"(b) To the importer upon payment of VAT prior to the release of

goods from Customs custody.

"(c) To the purchaser of services or the lessee or licensee upon

payment of the compensation, rental, royalty or fee."

Based on the foregoing provisions, the input VAT paid by a

VAT-registered person in the sale of goods, properties or services from another
VAT-registered person, in the course of his trade or business, shall be creditable
against the output VAT.

Thus, JJS' VAT invoices issued by JJPI (for and on behalf of JJS) will give
rise to an output tax on the part of JJS, being a VAT-registered person, and input
tax credit in the hands of its Philippine customers. On the other hand, JJS will be
allowed to offset against its output tax, input VAT for payments made to third
party manufacturing service providers, suppliers of finished goods, who are all
VAT-registered persons, and on importation of raw materials and finished goods
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 into the Philippines.

This ruling is issued on the basis of the facts as represented. 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.) JOSE MARIO C. BUÑAG

Deputy Commissioner
Legal and Inspection Group
Bureau of Internal Revenue

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