ITAD BIR Ruling No. 208-15

June 10, 2015 ITAD BIR RULING NO. 208-15 Articles 5 & 7, Philippines-Netherlands tax treaty Unilever Philippines 1351 United Nations Avenue Manila 1007 Attention : Catherine Siochi-De Asa Financial Accounting Operations Control and Tax Manager Jeihan O. Sinnung Financial Controller Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 1, 2010, requesting confirmation that the service fees to be paid by Unilever Philippines, Inc. ("Unilever-Phil") to Unilever N.V. ("Unilever-Netherlands") are in the nature of business profits, and therefore not subject to Philippine income tax pursuant to the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") , and, are not subject to value-added tax (VAT). It is represented that Unilever-Netherlands , with address at Weena 455 10 E 13, 3013 AL, Rotterdam, The Netherlands, is a resident of The Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Inspector of the Tax Administration of the Netherlands on June 15, 2010; that it is not registered either as a corporation or a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 31, 2010; and that, on the other hand, Unilever-Phil is a corporation organized and existing under the laws of the Philippines with principal office at 1351 United Nations Avenue, Manila. It is further represented that on January 1, 2007, Unilever-Netherlands and Unilever-Phil entered into a Unilever Regional Services Agreement , as amended on April 23, 2010 (" Agreement ") whereas Unilever-Netherlands is one of the two parent companies of international group of companies known as Unilever Group ; that Unilever Group manufactures and/or buys, markets, distributes, and sells various Products 1 throughout most of the world, and employs a Corporate, Category and Regional organisational structure, and that Unilever-Phil is a Group Company which forms part of one or more Categories and also forms part of one or more Regions; that Unilever-Netherlands provides or makes available to Unilever-Phil the following services: CAIHTE Regional Services are those services other than Regional Category Services provided by the management and supporting staff of a Region and certain Group Companies as agreed by the management of such Region, which benefit the Group Companies within that Region, which include, but are not limited to, the following: (a) Activities performed by the management of the Region in developing business strategies for the Region, developing plans to execute regional strategies, coordinating the operations of the Region and, advising the Region generally; (b) Services provided by regional innovation centres and similar centres which are responsible for certain regional activities such as localization and enhancements for certain Products for the Region; (c) Services except Other Services, provided by regional information technology centres and similar centres, which may provide analysis, design, development and other support services relating to data and/or information technology for the Region; (d) Services provided by regional audit offices for the Region and similar services; and (e) Expert and/or transformational and transaction support, assistance and advice by the regional functional departments including but not limited to legal, taxation, finance, human resources and other regional support services rendered by certain Group Companies. Regional Category Services are those services in respect of a Product Category provided by the management and supporting staff of a Regional Category and certain Group Companies as agreed by the management of such Regional Category, which benefit the Group Companies within that Category, which include but are not limited to, the following: (a) Developing Regional Category strategies and providing strategic regional business leadership; (b) Assisting the management of Regions and/or Group Companies to translate Regional Category strategies into country strategies; and (c) The provision of support, assistance and advise from staff and personnel of the Regional Category teams. Other Services are those services which benefits the Group Companies in the Region, to the extent that these are not Regional Category Services or Regional Services, and could include, but are not limited to the activities of the infrastructure organization which provides services in the area of information technology and communications, including but not limited to Infrastructure Management Services, and information and data Processing services. Infrastructure Management Services includes, but is not limited to, the organisation, management, procurement, operation and maintenance of: computer servers and proprietary hardware, desktop and mobile computers, printers and scanners, Unilever networks (local, national and global), voice, data and video communications, facsimile equipment, platform software (operating system, database, standard desktop), and end-user support (helpdesk) and training for the above. DETACa And that all services will, so far as practicable, be provided in the English language and may be provided in any format, including electronic, paper, oral, verbal or in any other possible format. It is further represented per the Certification issued by Unilever-Phil dated June 29, 2011, that any services, present and/or future, provided and to be provided by Unilever-Netherlands under the Agreement are being/shall be rendered entirely outside the Philippines; that in consideration for the Services provided, or made available, by Unilever-Netherlands in accordance with the Agreement, Unilever-Phil shall pay a fee of 3.0% (three percent) on an annual basis of its Turnover; 2 and that the Agreement shall be deemed to have come into effect from the Effective Date and shall remain in force for an indefinite period unless terminated by mutual agreement between Unilever-Phil and Unilever-Netherlands . It is finally represented, per the Sworn Statement issued by Unilever-Phil dated September 16, 2010, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or 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, to profits derived in the Philippines by a nonresident foreign corporation. 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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" Thus, Article 7 of the Philippines-Netherlands tax treaty provides: aDSIHc "Article 7 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 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 Contracting State but only so much of them as is attributable to that permanent establishment." Based on the above, the profits of an enterprise of a Contracting State shall be taxable only in that Contracting 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 aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them that is attributable to that permanent establishment. Applying this to the instant case, if, the service fees to be received by Unilever-Netherlands are for services rendered in the Philippines, then it shall be taxable in the Philippines only if it has a permanent establishment in the Philippines in connection with the activities giving rise to such income. In relation thereto, Article 5 of the same tax treaty defines a permanent establishment, as follows: "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means of a fixed place of business in which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: xxx xxx xxx h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where the 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. xxx xxx xxx" Considering that the services are rendered by Unilever-Netherlands outside the Philippines, and that Unilever-Netherlands is not deemed to have a permanent establishment in the Philippines to which its business profits may be attributed, then, the service fees paid by Unilever-Phil to Unilever-Netherlands are not subject to Philippine income tax pursuant to Article 7 (1) in relation to Articles 5 (1) and 5 (2) (h) of the Philippines-Netherlands tax treaty. Lastly, since it is represented that the said services will be rendered entirely outside the Philippines, the service fees paid by Unilever-Phil to Unilever-Netherlands shall not be subject to the VAT imposed under Section 108 (A) of the Tax Code of 1997, as amended, which provides: "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 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%), 3 after any of the following conditions has been satisfied: ETHIDa (i) . . . (ii) . . . . . . . . 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, . . ." Section 108 (A) clearly states that the sale or exchange of services subject to VAT include only those services that are performed in the Philippines. Accordingly, since the subject services will not be performed in the Philippines, the service fees in consideration for the said services paid by Unilever-Phil to Unilever-Netherlands are therefore not subject to VAT. 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 1. " Product " shall mean any product or goods supplied in the course of Unilever-Phil's ordinary activities during the term of the Agreement irrespective of whether Unilever-Phil, in whole or in part, manufacturers or buys the products. 2. " Turnover " (an abbreviated form of "Third Party Turnover") shall mean the invoiced sale value to Unilever-Phil's customers of goods supplied and services rendered in the course of Unilever-Phil's ordinary activities during the relevant financial period, excluding indirect taxes (such as value added tax and, if any, special consumption tax) and after allowance for all discounts and refunds given for goods returned or destroyed. Third Party Turnover shall exclude export sales to Group Companies and sales of goods supplied by group Companies in Philippines. For the purposes of this Agreement, the Third party Turnover will be translated into Unilever-Netherlands' base currency. 3. The VAT rate was increased to 12% on February 1, 2006, in accordance with the Memorandum of the Executive Secretary to the Secretary of Finance dated January 31, 2006, as circularized by Revenue Memorandum Circular No. 7-2006 (Publishing the Full Text of the Memorandum from Executive Secretary Eduardo R. Ermita dated January 31, 2006 Approving the Recommendation of the Secretary of Finance to Increase the Value Added Tax Rate from Ten Percent to Twelve Percent) dated January 31, 2006.