ITAD Ruling No. 101-02

May 28, 2002 ITAD RULING NO. 101-02 Sec. 34 & 42 of the Tax Code of 1997; Articles 5 & 7 RP-Netherlands Tax Treaty BIR Ruling Nos. 001-90 & 036-90 Joaquin Cunanan & Co. 14/F, Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Atty. Mary Assumption S. Bautista Principal Partner Tax Services Department Gentlemen : This refers to your letter dated September 30, 1998 on behalf of your client, Unilever Philippines (UPI), requesting for confirmation of your opinion that the service fees to be paid by UPI to Unilever Business Group Services, B.V. (UBGS) are not subject to Philippine income tax and consequently to the withholding tax pursuant to the RP-Netherlands tax treaty and that the said fees are deductible business expense under Section 34(a)(1) of the National Internal Revenue Code (Tax Code) of 1997. It is represented that UPI is a domestic corporation and is primarily engaged in the manufacture of various consumer products; that UBGS is a corporation organized under the laws of The Netherlands with office address at Weena 455, 3013 AL Rotterdam, The Netherlands; that UBGS is not registered either as a corporation or as a partnership licensed to do business in the Philippines as evidenced by a certification issued by the Securities and Exchange Commission dated October 5, 1998; that UBGS is primarily engaged in rendering various services to the members of its group of companies which includes UPI; that UPI entered into a Business Group Services Agreement (Service Agreement) with UBGS for the purpose of obtaining the necessary assistance/services in various areas of concern which UPI believes will eventually propel business development and growth; that under the Service Agreement, UBGS undertakes in securing UPI certain Business Group Services; that the services include, but are not limited to, the following: (a) the activities performed by the Business Group Management: 1 in developing regional strategies for the Business Group 2 in developing plans to execute corporate strategy in coordinating the business operations of the Business Group in advising the Business Group; (b) the services provided by regional innovation and similar centres, which are responsible for the development such as localization and enhancements for a Product Category; 3 (c) the services provided by regional information technology centres, which provide analysis, design, development and other support services relating to information technology for the Business Group; (d) the services provided by the regional audit offices for the Business Group; and (e) other services rendered by certain Group Companies 4 such as regional support, marketing, market research and brand support; that the term Business Group Services does not include services which are intended to be of a global application, including: a) the corporate research and corporate development primarily performed at Unilever's Central research and development laboratories; b) the provision of know-how and other intellectual property including but not limited to trademarks, patents, copyrights, designs, models, and similar rights; and c) the provision or corporate strategic leadership and other services not directly related to a specific Business Group; that the foregoing services shall be rendered by UBGS outside of the Philippines and cannot be rendered by a local consultant or practitioner; that in consideration of such services, UPI shall pay UBGS a service fee of one and one-half percent (1.5%) of its total net sales value; that the Service Agreement is covered by a Certificate of Registration No. 2079 issued by the Bureau of Patent, Trademarks and Technology Transfer on December 29, 1997 with a validity period of ten (10) years (from January 1, 1997 to December 31, 2006);and that the Amended Service Agreement is covered by a Certificate of Compliance No. 5-2000-00091 dated Nov. 22, 2000, valid until December 31, 2006. In reply, please be informed that Article 7(1) and Article 5(2)(h) of the RP-Netherlands tax treaty respectively provide, viz : "Article 7 "BUSINESS PROFITS "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein ..." "Article 5 "PERMANENT ESTABLISHMENT "1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business in which the business of the 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 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." Based on the foregoing provisions, an enterprise which is a resident of the Netherlands is taxable only in the Netherlands unless it carries on business in the Philippines through a permanent establishment situated therein. The term "permanent establishment",as has been defined under Article 5 of the tax treaty, includes the furnishing of consultancy services by an enterprise through an employee or other personnel where 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. Thus, technical or consultancy services rendered outside the Philippines, or even if these are rendered within the Philippines but the rendition thereof is for an aggregate period of less than 183 days during a given taxable year, shall not constitute a permanent establishment for the foreign enterprise. Moreover, the aforementioned fee is not within the contemplation of "Rentals and Royalties" under Section 42(A)(4) of the Tax Code of 1997 since there is no transfer into the Philippines of technology, equipment or other property where the payee has proprietary interest. To be considered thereunder, there must be transfer of scientific, technical, industrial or commercial knowledge or information. In the instant case, there is no transfer of technology in this country as the service fees to be paid by UPI to UBGS constitute payment for the aforementioned technical support services performed outside of the Philippines. Thus, the fees paid to UBGS shall not be considered as royalties but shall constitute compensation for labor or personal service performed outside the Philippines and therefore considered income from sources without the Philippines pursuant to Section 42(C)(3) of the Tax Code of 1997. In view thereof, this Office is of the opinion and so holds that since the services covered by the subject Service Agreement are rendered by UBGS outside the Philippines, and considering further that UBGS has no permanent establishment in the Philippines, the payments made by UPI to UBGS for said services shall not be subject to Philippine income tax and consequently to the withholding tax under Section 28(B)(1) of the Tax Code of 1997. As regards to whether said fees are considered deductible business expenses under Section 34(a)(1) of the Tax Code, as amended, please be informed that we decline to rule on the matter considering the factual nature of the issue raised. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service Footnotes 1. the term "Business Group Management" is defined as a management team led by a Business Group President. 2. "Business Group" is a collection of Group Companies including division of Group Companies. 3. "Product Category" means a group of products as set out, from time to time by the East Asia Pacific BG Management . 4. "Group Company" means either Unilever N.V. or Unilever PLC or a legal entity owned or controlled either individually or together, directly or indirectly by Unilever N.V. or Unilever PLC.