ITAD BIR Ruling No. 113-14

July 21, 2014 ITAD BIR RULING NO. 113-14 Article 12 (Royalties), Philippines-Netherlands tax treaty Unilever RFM Ice Cream, Inc. Manggahan Light Industrial Park A. Rodriguez Avenue, Barrio Manggahan Pasig City Attention: Ms. Catherine Siochi-De Asa Financial Accounting Operations, Control and Tax Manager Ms. Lettice Lin Financial Controller Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on June 1, 2011 requesting confirmation that royalties paid by Unilever RFM Ice Cream, Inc. ("Unilever Philippines") to Unilever N.V. ("Unilever") are subject to income tax at the rate of 15 percent 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 Unilever is a foreign corporation and a resident of the Netherlands based on its Articles of Association and its Declaration of Residence issued by the Tax Administration of Rotterdam in the Netherlands on June 15, 2010. Unilever is located at Weena 455, Rotterdam, the Netherlands. It is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company issued by the Securities and Exchange Commission on June 9, 2010. On the other hand, Unilever Philippines is a domestic corporation located at Manggahan Light Industrial Park, A. Rodriguez Avenue, Barrio Manggahan, Pasig City, Philippines. cDEHIC On April 5, 2010 , Unilever Philippines and Unilever entered into a Service Agreement where Unilever agreed to provide Unilever Philippines the right to use secret processes, inventions and improvements, and trademarks relevant to the manufacture and sale of impulse ice cream products in the Philippines, among others. In consideration, Unilever Philippines will compensate Unilever as follows: (a) a service fee equivalent to 3 percent of Unilever Philippines' net sales of the products every quarter, and (b) a bonus royalty equivalent to 2 percent of Unilever Philippines' net foreign exchange earnings on the products every quarter. The Agreement retroactively took effect on April 1, 2009 and will be in effect for five years or up to March 31, 2014. The Agreement complies with the provisions of the Intellectual Property Code on voluntary licensing, based on Certificate of Compliance No. 5-2010-0054 issued by the Intellectual Property Office on September 24, 2010 and valid for five years from April 1, 2009 to March 31, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, (" Tax Code ") provides: "SEC. 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 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%)." CAcIES However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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 case, Article 12 of the Philippines-Netherlands tax treaty provides, to wit: "Article 12 Royalties 1. Royalties arising in one of the States and paid to a resident of the other State may be taxed in that other State. 2. However, such royalties may also be taxed in the State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed: a) 10 per cent of the gross amount of the royalties where the royalties are paid by an enterprise registered, and engaged in preferred areas of activities in that State; and IaHAcT b) 15 per cent of the gross amount of the royalties in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. 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 cinematograph films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Under Article 12, royalties arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the royalties are paid by a registered enterprise and engaged in preferred areas of activities in the Philippines, and (b) 15 percent in all other cases. The term royalties 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 cinematograph films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience (" know-how "). Accordingly, since Unilever Philippines is granted a right to use secret processes, inventions and improvements, and trademarks relevant to the manufacture and sale of impulse ice cream products in the Philippines, the service fee and the bonus royalty paid by Unilever Philippines to Unilever are essentially payments for the use of secret formula or process, patent, know-how and trademark and as such are considered royalties .Moreover, since Unilever Philippines is not a registered enterprise and engaged in preferred areas of activities in the Philippines, such royalties paid by Unilever Philippines to Unilever shall be subject to income tax at the rate of 15 percent , pursuant to paragraph 2 (b), Article 12 of the Philippines-Netherlands tax treaty. Furthermore, under Section 108 (A) of the Tax Code, the said royalties for the use of intangible properties in the Philippines are subject to value-added tax ("VAT"), to wit: DIHETS "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 selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: ..." Relative thereto, Unilever Philippines shall withhold VAT on the royalties at the rate of 12 percent before remitting them to Unilever. Unilever Philippines shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld).If it is a VAT-registered taxpayer, Unilever Philippines shall use the duly filed BIR Form No. 1600 and the accompanying proof of payment thereof as documentary substantiation for its claim of input tax on the royalties; otherwise, it may treat the VAT as an asset or expense, whichever is applicable. VAT withheld shall be remitted within ten days following the end of the month the withholding was made. This ruling is issued on the basis of 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.