ITAD Ruling No. 152-05

December 2, 2005 ITAD RULING NO. 152-05 Philippines-Netherlands tax treaty Articles 5 and 7 BIR Ruling No. DA-ITAD-134-02 Joaquin Cunanan & Co . 29th Floor Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Mary Assumption S. Bautista-Villareal Principal, Tax Services Gentlemen : This refers to your letter dated February 7, 2005 on behalf of your client, Unilever Foods Philippines (CMC) Inc. (UFP),(formerly California Manufacturing Co.,Inc.) requesting confirmation of your opinion that: 1. Services fees paid by UFP to Unilever N. V. (UNV) pursuant to the Unilever Business Group Services Agreement (UBGSA) between the parties are in the nature of business profits and not royalties under Articles 7 and 12 of the Philippines-Netherlands tax treaty; and 2. As business profits, said service fees are exempt from Philippine income/withholding tax on the ground that UNV has no permanent establishment in the Philippines based on Article 7 in relation to Article 5 of the same tax treaty. It is represented that UNV is a nonresident foreign corporation duly organized and existing under the laws of The Netherlands, with principal address at Weena 455, 3013 AL Rotterdam, Netherlands; that UNV is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by Securities and Exchange Commission dated January 27, 2005; that UFP is a corporation duly organized and existing under the laws of the Philippines with office address at Km. 18, East Service Road, South Superhighway, Paraaque City; that UFP is primarily engaged in the manufacture of various consumer products; that on June 2, 2004, UFP and UNV entered into an Unilever Business Group Services Agreement (UBGSA);that under the UBGSA, UNV shall, either by itself or through one or more of the Group Companies (i.e. Unilever PLC or a legal entity owned or controlled, either individually or together, directly or a indirectly, by UNV or Unilever PLC),make available to UFP certain Business Group Services that include, but are not limited to, (a) management such as developing strategies, plans to execute corporate strategy, and coordinating the business operations of the group, (b) product developments such as localization and enhancements, (c) information technology such as analysis, design, development and support services, (d) audit, and (e) other services such as regional support, marketing, market research and brand support; that Business Group Services (BGS) do not include services intended to be of global application including (a) corporate research and development primarily performed at UNV's central research and development laboratories, and (b) provision of know-how and other intellectual property including, but not limited to, trademarks, patents, copyrights, designs, models and similar rights; that the BGS are principally rendered by UNV outside the Philippines, but, services may be required to be rendered in the Philippines which shall not exceed a period of 183 days within any twelve-month period; that the UBGSA shall be effective from April 2004 and shall remain in force for a period of ten (10) years unless terminated by mutual agreement of the parties; and that for and in consideration of the BGS, UFP shall pay to UNV a service fee of three per cent (3%) of UFP's total Net Sales Value during the quarter in four (4) quarterly installments each within thirty (30) days of the end of each quarter. IaEHSD In reply, please be informed that Articles 7 and 5 of the Philippines-Netherlands tax treaty respectively states that: "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. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. "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 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 protect) for a period or periods exceeding in the aggregate 183 days within any twelve-month period ." (Emphasis supplied) Under the aforequoted provisions, it is clear that if a resident corporation of The Netherlands carries on business in the Philippines through a permanent establishment situated in the latter, the profits of the said corporation attributable to such permanent establishment shall be subject to Philippine income tax. For this purpose, a corporation which is a resident of The Netherlands may be deemed to have a permanent establishment in the Philippines if, among others, the furnishing of services by such corporation through its personnel, continue (for the same or a connected project) within the Philippines for a period or periods exceeding in the aggregate 183 days within any twelve-month period. Inasmuch as it is represented that the BGS covered by UBGSA will be rendered mostly outside the Philippines, and that the services that may be required to be rendered in the Philippines shall not exceed an aggregate period of 183 days, no permanent establishment is deemed established to which UNV's business profits could be attributed. In view thereof, this Office confirms your opinion and so holds that the service fees to be paid by UFP to UNL under the UBGSA are not subject to Philippine income tax, pursuant to the Philippines-Netherlands tax treaty. (BIR Ruling No. DA-ITAD-134-02 dated August 2, 2002) Moreover, the service fees to be paid by UFP to UNL relative to services performed here in the Philippines shall be subject to the ten percent (10%) value-added tax (VAT) pursuant to Section 108(A) of the Tax Code of 1997. Accordingly, UFP being the payor in control of the payment shall be responsible for withholding the VAT on such fees before remitting them to UNL. In remitting to the Bureau of Internal Revenue the VAT withheld, UFP shall use BIR Form No. 1600 (Monthly Remittance Return of Value-Added Tax and Other Percentage Taxes Withheld). If a VAT-registered taxpayer, UFP may use as documentary substantiation for its claim of input VAT the duly filed BIR Form No. 1600 and the proof of payment accompanying it. On the other hand, if it is a non-VAT registered taxpayer, UFP may include as part of the cost of the services provided to it by UNL the VAT consequently passed on to it and may treat such VAT either as an expense or as an asset, whichever is applicable. In addition, UFP is required to issue the Certificate of Final Tax Withheld at Source (BIR Form No. 2306) in quadruplicate, the first three copies thereof to be given to UNL upon its request and the fourth copy to be retained by UFP as its file copy. (Sections 4 & 6, Revenue Regulations (RR) No. 4-2002, Section 3 of RR No. 8-2002 and Section 7 of RR No. 14-2002) IcaEDC This ruling is issued based on the facts as 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service