ITAD BIR Ruling No. 353-15

December 10, 2015 ITAD BIR RULING NO. 353-15 Article 12, Philippines-Switzerland tax treaty Ortega Bacorro Odulio Calma & Carbonell Law Offices ALPAP I Bldg., 5th & 6th Floors 140 L.P. Leviste Street Salcedo Village 1227 Makati City Attention: Atty. Renato G. Calma Legal Consultant Gentlemen : This refers to your tax treaty relief application filed on April 29, 2013, on behalf of KRAFT FOODS SCHWEIZ HOLDING GMBH ("Kraft Holding") , requesting confirmation that the royalty payments to Kraft Holding by KRAFT FOODS (PHILIPPINES), INC. ("Kraft Foods") are subject to the 15 percent preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that Kraft Holding is a corporation organized and existing under the laws of Switzerland and is a resident of Switzerland Zugper Certificate of Fiscal Residence issued by the Cantonal Tax Administration Zug on September 13, 2012; that Kraft Holding is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated February 11, 2013; that the purpose of Kraft Holding is the participation in companies in Switzerland and abroad, for its own account or for the account of third parties, in particular, in companies of the Kraft Foods group and in the other companies of the food industry and the food trading and engage in any activity which is directly or indirectly related to any of the aforementioned purpose, in particular, it may acquire, manage and commercialize any industrial, literary and artistic intellectual property rights as well as acquire, and sell real estate in Switzerland and abroad; that, on the other hand, Kraft Foods is a domestic corporation duly organized and existing under the laws of the Philippines; and that it is into the business of manufacturing and marketing cheese, salad aids, sandwich spreads and powdered beverages, and also in importation and distribution of imported cheese, confectionery and other products from other Kraft business unit. It is further represented that Kraft Holding and Kraft Foods entered into a License Agreement ("Agreement") effective on January 1, 2013 and shall continue subject to termination by either party on six months prior written notice; that pursuant to the Agreement Kraft Holding grants to Kraft Foods the non-exclusive and sub-licensable right and license to: (i) use the subject trademarks, in particular to affix the subject trademark to the products or their packaging, to offer or market the products under the subject trademarks and to use the subject trademarks in advertising; (ii) use the know-how in the manufacture of products or performance of services rendered or to be rendered in combination with the subject trademarks; and (iii) make, use, keep, import, export, offer for sale and sell products and to perform methods covered by the subject patents; that in consideration of the rights and licenses granted to Kraft Foods by Kraft Holding, Kraft Foods agrees to pay a royalty an amount equal to Kraft Foods' net sales of products multiplied by the royalty rate as follows: Coffee 2.50% Chocolate 2.00% Chocolate Refreshment Beverages 2.00% Cheese and Dairy 1.75% Grocery 1.75% Refreshment Beverages 1.75% It is finally represented, based on the Sworn Statement by Kraft Foods on April 26, 2013, that the transaction subject of the request for 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 of the taxpayer/s involved. In reply, please be informed that royalty payments to a nonresident foreign corporation are, in general, covered by Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended. 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 . . ., royalties . . .: 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: "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 accordance with the foregoing, Article 13 of the Philippines-Switzerland tax treaty may apply to the subject payments. It 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. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be shall apply. xxx xxx xxx" Based on the aforequoted provisions the tax imposed on royalties derived by a resident of Switzerland like Kraft Holding from sources within the Philippines may be taxed in the Philippines at a rate not exceeding 15 percent of the gross amount of the royalties. Accordingly, since the beneficial owner of the subject royalty, Kraft Holding , is a company resident of Switzerland with no fixed place of business in the Philippines, and considering that the royalty income of Kraft Foods from Kraft Holding under the Agreement are essentially royalties for the use or the right to use of trademarks, then said royalties shall be subject to income tax at the reduced rate of 15 percent of the gross amount thereof, pursuant to Article 12 (2) of the Philippines-Switzerland tax treaty. 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