Sycip Gorres Velayo and Co.

June 16, 2021 ITAD BIR RULING NO. 031-21 Articles 5 (Permanent Establishment) and 7 (Business Profits) Philippines-Netherlands tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue Makati City Attention: _________________________ Partner, Tax and Customs Services Gentlemen : This refers to our tax treaty relief application filed on October 30, 2013 requesting confirmation that the service fees paid by Unilever Philippines, Inc. ("UPI") to Unilever N.V. ("UNV") are exempt from income tax pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . FACTS UNV is a corporation organized and existing under the laws of the Netherlands and a resident thereof based on its Articles of Association and Declaration of Residence issued by the Tax Administration of Rotterdam in the Netherlands. It is engaged in the manufacture and sale of food and drink products, home care products, and personal care products. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, UPI is a domestic corporation engaged in manufacturing, processing, refining, crushing, growing, buying, selling, importing, exporting, and dealing in all kinds of soaps, detergents, washing powders, polishes, cleansing substances, perfumery toilet requisites and food. Based on its Audited Financial Statements as of December 31, 2017, UPI is a wholly-owned subsidiary of New Asia B.V. of the Netherlands. Their ultimate parents are UNV and Unilever PLC of the United Kingdom of Great Britain and Northern Ireland. On June 25, 2013, UPI and UNV entered into a Central Services Agreement (the Agreement ) whereby the latter agreed to provide intercompany services to the former, which are also provided to other members of the Unilever Group of Companies worldwide from time to time. UNV collects, allocates, and recovers the costs of the services by charging the members their fair share of the costs. The services under the Agreement are as follows: CAIHTE 1. Corporate services; 2. Category services; 3. Global markets leadership services or global businesses services; and 4. Other services. Corporate services encompass the core central activities within the UNV business that provide members with the ability to operate in the global market. These include strategic management services which provide the central growth capability for UPI in the Philippine market; services that provide insight, tools, information, training and implementation support for local staff with respect to developing customers in the local market and driving growth; and supply chain strategic services that provide UPI with significant competitive advantage in the local marketplace due to centralised sourcing, procurement, manufacturing, packaging and distribution functions and leveraging UNV 's scale and through superior market insights and knowledge, formulation flexibility and simplification initiatives. Category services provide long-term value creation in the business as measured by market share development, category growth, innovation metrics and brand health. These include research and development using the 4D model Define, Discover, Design and Deploy, and supported by critical functional capabilities; development of brand vision, brand guidelines, brand development, media buying, and brand innovation for different UNV products; communication services that allow UPI to integrate with global business in terms of business partnering and communicating the necessary information from other areas within the UNV group; and finance services and support, competitor analysis in the Philippines, South East Asian and global markets and process improvement. Global services are responsible for supporting the development of UNV products by defining and implementing marketing programs that define marketing strategy and shape clear priorities to confirm effectiveness and business returns; provide a platform to build successful businesses and brands; and deliver clear approaches and methods to develop insights on consumers and understanding shoppers. Other services include global food solution, cooperation with external parties, and innovation; provision of strategic management, vision and key performance indicators and goals for food solution business; and provision of strategic marketing services including identification, development and launch of global initiatives for new products. The services will be made available in such manner and time agreed upon by the parties. The services are necessary for UPI to ensure the standard of quality and appearance of Unilever products being distributed in the Philippines. In consideration, UPI will pay a service fee to UNV which shall not exceed four percent (45%) of the former's annual turnover or total net receivables from its customers. The fee is computed quarterly and payable on the fifteenth (15th) day of the month following each quarter. The Agreement took effect on October 1, 2013 and will remain in force indefinitely, unless terminated by either or both of the parties. Based on a sworn statement and certification issued by UPI on October 1, 2013 and May 29, 2014, respectively, all services under the Agreement are and will be performed by UNV outside the Philippines. UPI admitted that the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. RULING In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, income derived by a nonresident foreign corporation is subject to income tax at the rate of thirty percent (30%), to wit: DETACa " SEC. 28. Rates of Income Tax or 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." xxx xxx xxx However, under Section 32 (B) (5) of the Tax Code, such income is exempt to the extent required by any treaty obligation binding upon the Philippine government, thus: " SEC. 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." In this connection, paragraph 1, Article 7 and paragraphs 1 and 2, Article 5 of the Philippines-Netherlands tax treaty provide as follows: " Article 7 BUSINESS PROFITS 1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries 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." " 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 especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; aDSIHc g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period." Under Article 7, 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 business as such, such profits may be taxed in the other State but only so much of them as are attributable to the permanent establishment. Under Article 5, a permanent establishment means a fixed place of business in which the business of an enterprise is wholly or partly carried on, and includes, especially, a place of management, a branch, an office, a factory, and a workshop. It includes also the furnishing of services including consultancy services by the enterprise, through employees or other personnel thereof, which continue for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Accordingly, since UNV is not engaged in trade or business in the Philippines, does not have a branch, office, or other fixed place of business in the Philippines, and did not furnish services in the country for more than 183 days within any twelve-month period, UNV is, therefore, not deemed to have a permanent establishment under paragraphs 1 and 2, Article 5 of the Philippines-Netherlands tax treaty. Accordingly, the service fees paid by UPI to UNV under the Agreement are exempt from income tax pursuant to paragraph 1, Article 7 of the treaty. Finally, since the services are not performed by UNV in the Philippines, the service fees are also exempt from value-added tax ("VAT") under Section 108 (A) of the Tax Code, thus: " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties. 1 (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: 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%) . . . The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . . " (Underscoring supplied) Under the destination or cross-border principle of the VAT system, services rendered in the Philippines are subject to VAT, while those performed abroad are exempt. ETHIDa This ruling is issued on the basis of the facts as represented. However, if it shall be disclosed upon investigation 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Under Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (hereinafter referred to as the TRAIN Law), which took effect on January 1, 2018, Section 108 (A) is amended and now reads: " SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties . (A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to twelve percent (12%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties. The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration . . . " n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.