ITAD Ruling No. 152-00

October 30, 2000 ITAD RULING NO. 152-00 RP-Netherlands-Art. 12 NIRC-Sec. 108 077-96 Joaquin Cunanan and Co. 14TH Floor, Multinational Bancorporation Center 6805 Ayala Avenue 1226 Makati City, Manila Attention: Mary Assumption S . Bautista-Villareal Principal, Tax Services Department Gentlemen : This refers to your letter dated October 22, 1998, requesting confirmation of your opinion that the service fees paid by your client, UNILEVER PHILIPPINES, INC. (UPI) to UNILEVER N. V. (NV) are subject to the preferential tax rate of ten per cent (10%) pursuant to Article 12(2)[a] of the RP-Netherlands Tax Treaty. It is represented that NV is a non-resident foreign corporation duly organized and existing under the laws of Netherlands, with office address at Weena 455, 3031 AL Rotterdam, Netherlands; that it is not registered as a corporation/partnership in the Philippines as per certification dated October 05, 1998 issued by the Securities and Exchange Commission; that UPI, on the other hand, is a Board of Investments (BOI) registered domestic corporation duly organized and existing under the laws of the Philippines primarily engaged in the manufacture of various consumer products; that for the purpose of securing the availability of NV's international experience in assisting UPI in the development of its business, UPI entered into a Service Agreement with NV whereby NV will provide UPI services which include but are not limited to training, research, trademark, patents, financial and accounting matter, internal audit, etc.; that in consideration for the aforementioned services, UPI will pay NV service fees equivalent to three percent (3%) of its total net sales value and a bonus royalty equivalent to two percent (2%) of the net foreign exchange earnings; that the original Agreement was effective from January 01, 1993 to December 31, 1997; that upon the expiration of the original Agreement on December 31, 1997, the parties renewed the same for ten (10) years effective January 01, 1998 to December 31, 2007; that the new Agreement contains the same terms and conditions of the original Agreement except for Section 1(a) which provides for an increase in the service fees to five percent (5%) of the third party net sales value of all Agreement products during the quarter; that the new Agreement complies with the provisions of the Intellectual Property Code as evidenced by the Certificate of Compliance No. 5-1998-00003 dated June 03, 1998, issued by the Intellectual Property Office. Invoking BIR Ruling dated June 16, 1995, which enunciated that the service fees paid under the old Agreement constitute royalties in accordance with Article 12 of the RP-Netherlands Tax Treaty and as such are subject to the preferential tax rate of 10%, it is now your contention that pursuant to the same tax treaty, the service fees under the new Agreement is also subject to the 10% preferential tax rate. ACTEHI In reply, please be informed that Article 12 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. xxx xxx xxx "4. 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 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. "xxx xxx xxx" Based on the foregoing, the royalty payments will be taxed at rate not to exceed 10% if the payor is an enterprise registered, and engaged in preferred areas of activities and, in all other cases, fifteen percent (15%) of the gross amount of the royalties. DSETcC Inasmuch as the BOI certifies that UPI is a preferred non-pioneer enterprise in the manufacture of its products as per Certificate of Registration No. 85-1031, dated November 29, 1985, the herein service fees which are paid for the use/right to use trademark, patents, financial and accounting matter, internal audit, etc., and information concerning industrial, commercial or scientific experience, qualify under Article 12(2)[a] of the RP-Netherlands Tax Treaty as royalty payments subject to the 10% tax rate. In view thereof, this Office hereby confirms your opinion. Hence, the service fees of UPI to NV are subject to the preferential tax rate of 10% based on gross. Moreover, the said payments are subject to the 10% value-added tax (VAT) pursuant to Section 108(A)(1) and (3) of the Tax Code and that UPI shall, before paying to NV, withhold and remit to this Bureau the said 10% VAT due thereon, by filing a separate VAT return for and on behalf of NV. The duly validated VAT declaration/return is sufficient evidence for UPI in claiming input tax credit. (Sec. 4.102-1(b) of Revenue Regulations No. 7-95, as amended by Revenue Regulations No. 6-97) This confirmation shall be valid for all fees payable by UNILEVER PHILIPPINES, INC. to UNILEVER N. V. under similar circumstances from January 01, 1998 to December 31, 2007, unless otherwise earlier revoked by this Office. 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. Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group