Nestlé Philippines, Inc.

March 14, 2007 BIR RULING [DA-152-07] 33; 34; RR 3-98; DA-255-2005; DA-011-2007 Nestl Philippines, Inc. Nestle Center, 31 Plaza Drive Rockwell Center Makati City Attention: Mr. Peter A. Noszek Executive Vice-President Gentlemen : This refers to your letter dated February 12, 2007 requesting for a ruling on the proper rate of tax due on the earnings or income received by your executive employees from a Restricted Stock Unit Plan. The scheme under the Restricted Stock Unit Plan ("RSUP"), is as follows: 1. The RSUP provides selected executives of Nestl Philippines, Inc. (NPI) with an opportunity to receive a number of shares of stock of Nestl SA, a foreign company which is the sole stockholder of NPI (or their cash equivalent) at a specified future date. 2. In RSUP, actual shares or cash are delivered without further restrictions. There is neither an exercise price nor a limited exercise period. The benefit is the market price of the share at the end of the restricted period. CDESIA 3. Under the Plan, a certain number of shares are granted but are not transferred during a restricted period of three (3) years from the time of the grant. During this period, the Stock Units are non-tradable and do not entitle the participant to any shareholder rights, e.g ., dividend payments or voting rights, until the shares are vested and transferred to the participant at the end of the restricted period. 4. Upon vesting, Nestl S.A. shall determine whether shares, free of charge, or the cash equivalent of the shares, shall be transferred to the participant. 5. Payment of Cash Equivalent shall be made as soon as possible upon vesting. In case of grant of shares, the transferred shares shall belong to the participant and are at his/her disposal. 6. Upon termination of employment of a participant as a result of death, redundancy, disability, retirement, termination without cause or divestiture, all Restricted Stock Units shall vest at the date of termination with the Company. 7. Upon voluntary resignation or termination of employment for cause of a participant, all Restricted Stock Units shall automatically be terminated and become void without any compensation, at the date of termination. In reply, please be informed that Section 2.33(A) of Revenue Regulations (RR) No. 3-98 provides that a final withholding tax is hereby imposed on the grossed-up monetary value of fringe benefit furnished, granted or paid by the employer to the employee, except rank and file employees, whether such employer is an individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities except when: (1) the fringe benefit is required by the nature of or necessary to the trade, business or profession of the employer; or (2) when the fringe benefit is for the convenience or advantage of the employer. The term "fringe benefit" means any good, service, or other benefit furnished or granted by an employer in cash or in kind, in addition to basic salaries, to an individual employee (except rank and file employee). It is clear from your representations that the executives of NPI who are qualified under your RSUP receive benefits either in Nestl SA shares or its cash equivalent which clearly constitute a fringe benefit under Section 2.33 (A) of RR No. 3-98. Such being the case, the benefits under your RSUP are subject to the fringe benefit tax under Section 33 (A) of the Tax Code of 1997, as amended, which provides, as follows: "(A) Imposition of Tax. A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and the employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business profession of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of the said Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter . . . " From the above-quoted provision, NPI being the employer, is liable to pay a final tax of 32% based on the grossed-up value of the benefit granted, which represents the actual monetary value of the aforesaid benefit under your RSUP. Accordingly, the 32% tax is payable upon the delivery of the shares of stock or its cash equivalent. Furthermore, Section 34 (A) (1) of the Tax Code of 1997, as amended, provides that "(a) In General. There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation from personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid. xxx xxx xxx" The following are the requisites for deductibility of business expenses from gross income: (1) The expense must be ordinary and necessary; (2) It must be paid or incurred during the taxable year; (3) It may be paid or incurred in carrying on the trade or business; (4) It must be supported by receipts, vouchers or documents. (see Zamora vs. Collector, L-15280, May 31, 1953) For this purpose, it is clear that the deduction shall be made in the year when the related expense is incurred which in this case is at the time of the delivery of the shares of stock of Nestl SA or its cash equivalent. Such being the case, NPI can claim as deduction from gross income the grossed-up monetary value of the benefit that is furnished to its executives under the RSVP, which is the value of the shares of stock of Nestl SA at the time of its delivery to the executives participating in the RSVP, or its cash equivalent. EHScCA This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service