ITAD BIR Ruling No. 042-10

September 23, 2010 ITAD BIR RULING NO. 042-10 Articles 10 (Dividends) and 12 (Royalties), Philippines-Switzerland tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended Salvador & Associates 815-816 Tower One & Exchange Plaza, Ayala Triangle, Ayala Avenue, 1226 Makati City Attention: Maria Rosario L. Bernardo Adan T. Delamide & Ian Dominic Pua Gentlemen : This refers to your letter dated January 16, 2009 on behalf of your client, Nestl Philippines, Inc. (NPI) , requesting confirmation of your opinion on the following: 1. that the dividend payments by NPI to Nestl S.A. (NSA) are subject to 10 percent final withholding tax pursuant to Article 10 (2) (a) of the RP-Switzerland tax treaty; and 2. that the royalty payments by NPI to NSA are subject to 15 percent final withholding tax pursuant to Article 12 (2) (c) of the RP-Switzerland tax treaty. It is represented that NSA with business address at Avenue Nestl 55, 1800 Vevey, Cantor of Vand, Switzerland, is a resident of Switzerland for taxation purpose, as evidenced by the certification, issued by the Chancery of State, Canton of Vaud, Switzerland, authenticated by Mr. Christophe Chevalley on April 1, 2008; that NSA is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated November 20, 2008; that Societe des Produits Nestl S.A. (SPN) and Nestec S.A. (Nestec) are non-resident foreign corporations duly organized and existing under the laws of Switzerland, both with business address at Avenue Nestl 55, 1800 Vevey, Cantor of Vand, Switzerland; and that, on the other hand NPI is a corporation duly organized and existing under and by virtue of the laws of the Philippines with business address at 31 Plaza Drive, Rockwell Center, Makati City, Philippines. Declaration of Dividends It is further represented that as of December 31, 2008, NSA is a stockholder of record of Twenty-Three Million Nine Thousand Two Hundred Sixty-Five (23,009,265) shares of NPI, with a par value of One Hundred Pesos (PhP100.00) per share, amounting to Two Billion Three Hundred Million Nine Hundred Twenty-Six Thousand Five Hundred Pesos (PhP2,300,926,500.00), representing 99.99% of the total subscribed and paid-up capital of NPI as shown in the certification issued by the Corporate Secretary of NPI dated January 5, 2009; that on November 18, 2007 the Board of Directors of NPI declared cash dividends in the amount of Two Billion Pesos (PhP2,000,000,000.00), to be distributed among NPI's stockholders of record as of the date of the meeting, pro-rata to their respective shareholdings, to be paid on the same date. SCHIac Royalties It is also represented that NSA is the beneficial owner of Nestle Group's intellectual properties, such as Trademarks, 1 Patents, 2 and Know-how, 3 including all rights attached thereto; that it is also the legal and beneficial owner of almost 100 percent of the outstanding capital stocks of NPI; that SPN is the registered owner of the Trademarks, and SPN and Nestec are the registered owners of the Patents, and have the right to license the same to NPI; that Nestec has for many years been entrusted by NSA with the carrying out of diverse and comprehensive research and development activities (ranging from basic research to product development in the fields of human and non-human nutrition, food products and food technology, all of which are carried out by a large staff of scientific and technical personnel in a world-wide network of R&D laboratories, Product Technology Centres, pilot plants, field testing stations and other facilities) and other activities in relation to various aspects of the manufacture, processing, control, packaging, marketing, distribution and selling of various human and non-human specialized foods and other products, including the Products, 4 and Nestec has accordingly acquired or developed a considerable body of sophisticated and valuable know-how in such fields; that the parties hereto are aware of the fact that, due to the increasing trend towards the free flow of goods across state borders, the supply of goods amongst NSA's many licensees is evolving towards greater rationalization, and that the same needs to be organized, including by means of exclusive licenses, in such a manner as not to trigger multiple license fee payments; that NSI wishes to secure exclusive licenses of the Trademarks and of the Patents, and wishes to secure exclusive access to the Know-how strictly for the manufacture, processing, control, packaging, marketing, distribution and selling of the Products; and that NSA is willing to grant such exclusive licenses and access strictly on the terms and conditions hereafter set forth. It is further represented that in consideration of the foregoing, NPI agreed to pay NSA license fees equivalent to five percent (5%) of the net sales of the Products sold as computed under the terms and conditions of the General License Agreement (GLA), which is substantially reproduced in all its other GLAs, which provides: "32. License Fees In consideration of the Trademarks, Patents and Know-how licenses granted or to be granted hereunder by LICENSOR, LICENSEE shall pay to LICENSOR, during the term of this Agreement, license fees of five percent (5%) on the net sales of the Products sold under any of the Trademarks, xxx xxx xxx" that the license fees accrue daily but is payable on the last day of each month; and that the issue or transaction subject of the above request for ruling is not under investigation, neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: "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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: ADCETI "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" In this particular case, the treaty involved is the Philippines-Switzerland tax treaty which, in its Articles 10 and 12, provides as follows: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" Also, with respect to Royalties, please be informed that Article 12 of the Philippines-Switzerland 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, the royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties. 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 and films and tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. DaEcTC xxx xxx xxx" On Dividends Based on the aforequoted, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation. In all other cases, a 15 percent preferential tax rate applies. Such being the case, and considering that NSA holds 99.99% percent of the total shares of stock of NPI as of the date of declaration of the subject dividends, this Office is of the opinion and so holds, that the dividend payments by NPI to NSA shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. On Royalties Based on the aforequoted provisions the tax imposed on royalties derived by a resident of Switzerland from sources within the Philippines may be taxed in the Philippines at a rate not exceeding 15% of the gross amount of the royalties. In view thereof, your application for tax treaty relief is hereby granted, at a 15% preferential tax rate, based on the gross amount of the royalty payments made by NPI to NSA, pursuant to Article 12 (2) of the Philippines-Switzerland tax treaty. This ruling is issued based on 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 of Internal Revenue Footnotes 1. "Trademarks" shall mean the trademarks, trademark applications, brands, designs, get-ups, visual properties and the like set out or referred to in the Schedule of the General License Agreement, as the same may be amended from time to time by mutual agreement between the parties, as well as all future trademarks, trademark applications, brands, designs, get-ups, visual properties and the like pending incorporation into an amended Schedule, and all Related Intellectual Property Rights. 2. "Patents" shall mean the patents, patent applications, utility models and utility model applications owned by or licensed to NSA, including any equivalents, divisional, continuations, continuations-in-part, re-issues, registrations, additions or extensions thereof, as well as any further patents, patent applications, utility models and utility model applications which are owned by or licensed to NSA and which are filed or granted during the term of this Agreement and which strictly cover the Products; components or ingredients thereof; packaging therefor; processes for manufacture of the Products, components, ingredients or packaging; uses of any of the Products, components, ingredients or packaging thereof. 3. "Know-how" shall mean those of NSA's technical and non-technical information and data, whether capable of being patented or not, that are necessary for the industrial reproduction, directly and under the same conditions, of the Products and/or the technical or non-technical processes related thereto, including all of NSA's unpatented secret processes, trade secrets, formulae and other secret information concerning industrial, commercial or scientific experience, and including the processes required for the transfer and/or implementation of the Know-how, as NSA shall from time to time be in a position to render or make available on an as-needed basis to NPI strictly for or in relation to its own or contract-manufactured manufacture, processing, control, packaging, storage, supply, import, export, marketing, promotion, distribution and/or selling of the Products, which have been developed by or for or are otherwise available to NSA. 4. Date of General License Agreement Products Covered July 16, 2006 (including amendments Dairy, creamers, infant formula, soluble dated April 12, 2007 and April 1, coffees, powdered beverages, culinary 2008) products, ready-to-drink beverages, performance nutrition, roast and ground coffees, baby food and healthcare nutrition October 1, 2005 Soya-based Products: Refreshing and nutritious beverages, nutritious beverages, soya-based infant formulas, soy-based cereals, culinary products, soya-based beverages with high fiber and other culinary food products January 1, 2004 Ice Cream and Chilled Products November 1, 2004 (including Confectionary Products: Chocolate, sugar, amendment dated February 28, 2006) fruit-flavoured confectionary, and soft chewy confectionery March 15, 2003 Instant tea Products January 1, 2000 (including Petcare: Petfoods and other petcare products amendments dated May 4, 2000, July 23, 2002, and March 4, 2004)