ITAD Ruling No. 040-04

May 3, 2004 ITAD RULING NO. 040-04 Art. 12, RP-Switzerland BIR Ruling No. ITAD DA 73-03 Baniqued & Baniqued Law Office Suite 803, 8/F Jollibee Centre San Miguel Avenue, Ortigas Center Pasig City Attention: Laura Victoria A.S. Yuson-Layug Ma. Carlota Christina G. Laio-Santiago Gentlemen : This refers to your letter dated March 10, 2004 on behalf of your client, Beverage Partners Worldwide S.A. (BPW S.A.), requesting confirmation of the following: (1) that the royalties accrued and paid by Beverage Partners Worldwide (Philippines), Inc. [BPW (Philippines)] to BPW S.A. are subject to fifteen percent (15%) withholding tax pursuant to Philippines-Switzerland tax treaty; and (2) that the royalties actually remitted by BPW (Philippines) to BPW S.A. are subject to 10% value-added tax. It is represented that BPW S.A. is a joint venture company, owned in equal fifty percent (50%) shares by Nestle S.A. and The Coca-Cola Company, incorporated under the laws of Switzerland with office address at In der Luberzen 42 8902 Urdorf, Switzerland; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification dated March 4, 2004 issued by the Securities and Exchange Commission (SEC); that BPW (Philippines) is a domestic corporation duly organized and existing under the laws of the Philippines with office address at 4/F King's Court II Bldg., 2129 Chino Roces Ave., Makati City; that effective April 1, 2002, BPW S.A. and BPW (Philippines) entered into a Sub-License Agreement (Agreement) whereby BPW (Philippines) agreed to pay BPW S.A. royalties on all brands of the Beverages which are sold by or through BPW (Philippines) in consideration of the rights, license and sublicenses granted by BPW S.A. as well as the technical assistance granted or to be granted by BPW S.A. or its designee; that both parties agreed that the royalties are in consideration for all trademarks, technology and tradenames sublicensed by BPW S.A., including additional future improvements; that under the Agreement, the royalties to be paid are as follows: (1) In the case of Tea Beverages, Functional Beverages and Coffee Beverages other than NESCAFE Coffee Beverages, the royalty rate shall be equivalent to five (5.0) per cent of the Bottler's net sales value of the (finished) Beverages, "net sales value"; (2) In those circumstances where the Sub-Licensee BPW (Philippines) itself sells the finished Tea Beverages, Functional Beverages and Coffee Beverages other than NESCAFE Coffee Beverages, BPW (Philippines) shall pay to Licensor BPW S.A. as a royalty five (5.0) per cent of BPW (Philippines) own net sales value of the Beverages to third parties; (3) In the case of NESCAFE Coffee Beverages, the royalty rate shall be the standard rate being applied in respect of NESCAFE branded products in the Territory (the "Standard Rate") and shall be applied in the same manner as foreseen under (1) and (2) above. that BPW S.A. shall be entitled by written notice to BPW (Philippines) to revise at the end of any calendar year the rates of royalty applicable to the Agreement. In reply, 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 the 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. "xxx xxx xxx." 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, this Office hereby confirms your opinion that the royalties accrued and paid by BPW (Philippines) to BPW S.A. are subject to 15% final withholding tax pursuant to Article 12(2) of the Philippines-Switzerland tax treaty. ( BIR Ruling No. DA-ITAD 73-03 dated May 27, 2003 ) Moreover, royalty payments by BPW (Philippines) to BPW S.A. are subject to the 10% value-added tax (VAT) pursuant to Section 108(a) of the Tax Code of 1997. Accordingly, BPW (Philippines), being the resident withholding agent and payor in control of the payment, shall be responsible for the withholding of the 10% final VAT before making any payment to BPW S.A. In remitting the VAT withheld, BPW (Philippines) shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). The duly filed BIR Form 1600 and proof of payment thereof shall serve as documentary substantiation for the claim of input tax by BPW (Philippines) upon filing its own VAT Return, if it is a VAT-registered taxpayer. In case BPW (Philippines) is a non-VAT registered taxpayer, the passed-on VAT withheld shall form part of the cost of the service purchased which may be treated as "expense" or "asset", whichever is applicable. In addition, BPW (Philippines) is required to issue the Certificate of Final Tax Withheld at Source (BIR Form 2306) in quadruplicate upon request of BPW S.A., the first three copies thereof to be given to BPW S.A. and the fourth copy to be retained by BPW (Philippines) as its file copy. [Sections 4 & 6, Revenue Regulations (RR) No. 4-2002; Section 3 of RR 8-2002; Section 7 of RR 14-2002] This ruling is issued on the basis of the facts represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. TEcCHD Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service