ITAD Ruling No. 054-99

December 23, 1999 ITAD RULING NO. 054-99 RP-Netherlands Article 12 038-97 Joaquin Cunanan & Co. 14th Floor Multinational Bancorporation Center 6805 Ayala Avenue, Makati City Attention: Tomasa H . Lipana Managing Partner, Tax Services Gentlemen : This refers to your application for relief from double taxation dated July 30, 1999 on behalf of your client UNILEVER N. V. (UNV) requesting for a preferential tax treaty rate of 15 per cent to be withheld on dividend remittances by SELECTA WALLS, INC. (SWI) pursuant to RP-Netherlands Tax Treaty. It is represented that UNV is a non-resident foreign corporation duly organized and existing under the laws of Netherlands with principal office at Weena 455, 3013 AL Rotterdam, Netherlands; that UNV has no permanent establishment in the Philippines as evidenced by its Certificate of Non-Registration from the Securities and Exchange Commission dated August 5, 1999; that UNV entered into a Service Agreement with SWI , a domestic corporation engaged in the manufacture and sale of various ice cream products under the trade name "Selecta"; that SWI is duly registered with the Securities and Exchange Commission under Registration No. A199902956; that it has its principal office at Manggahan Light Industrial Park, A. Rodriguez Avenue, Bo. Manggahan, Pasig; that the Service Agreement between UNV and SWI dated April 28,1999 was duly registered with the Intellectual Property Office with Certificate of Compliance No. 5-1999-00045 with validity from April 1, 1999 to March 31, 2009; that the services to be rendered by UNV to SWI shall include but are not limited to training, research and development, trademarks, communication of patents, secret processes, access to central services and advisory department, advice on sourcing/buying raw materials, etc.; and that for and in consideration of the Service Agreement, SWI shall pay to UNV within one (1) month from the end of each quarter to which the fee relates: a) a services fee of three per cent (3%) in the third party net sales and b) a bonus royalty of two per cent (2%) of net foreign exchange earnings of all Agreement Products during the quarter. In reply, please be informed that Article 12, paragraph 2(b) of the RP-Netherlands Tax Treaty provides, viz: "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 (b) 15 per cent of the gross amount of the royalties in all other cases. 3. . . . 4. The term "royalties" as used in this Article means payment 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. llcd xxx xxx xxx" Accordingly, this Office hereby confirms your opinion that the royalty remittances of your client, SWI to UNV shall be subjected to the preferential tax rate of 15 percent. (BIR Ruling 038-97 dated April 3, 1997) Moreover, SWI shall be responsible for the payment of Value-Added Tax on such royalties in behalf of UNV by filing a separate VAT return pursuant to Section 4.102-1(b) of Revenue Regulation No. 7-95 as amended by Revenue Regulations No. 6-97, which provides that: "The VAT on rental and/or royalties payable to non-resident foreign corporation or owners for the sale of services and use or lease of properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The Licensee shall be responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owned by filing a separate VAT declaration/return for this purpose. The duly validated VAT declaration/return is sufficient evidence in claiming input tax credit by the licensee." This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. LexLib Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group