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: EATcHD "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. "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 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, Paraaque 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 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 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. a) b) c) d) e) f) g) h) The term 'permanent establishment' includes specially but is not limited to: A seat of management; A branch; An office; A store or other sales outlet; A factory; A workshop; A warehouse, in relation to a person providing storage facilities for others; A mine, quarry, or other place of extraction of natural resources; Cdpr

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 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 "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. "xxx xxx 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. 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. cHCSDa 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 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. tax. While JJS is not subject to Philippine income tax, it remains subject to value-added

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. 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. "(A) Invoicing and Accounting Requirements for VAT-Registered Persons.

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. 2. 3. the name, TIN and address of seller; date of transaction; 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. 6. xxx the word 'zero rated' imprinted on the invoice covering zero-rated sales; and the invoice value or consideration. xxx xxx" TEHIaD

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. ITAD29-02 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 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 valueadded 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 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. CcAESI Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group