BIR Ruling [DA-001-04]

January 5, 2004 BIR RULING [DA-001-04] Sec. 36 (a) (2) (B); 252-91; UN-210-94 Joaquin Cunanan & Co. 14th Floor, Multinational Bancorporation Center 6805 Ayala Avenue Makati City, Philippines Attention: Ms. Tomasa H. Lipana Managing Partner Tax and Corporate Services Gentlemen : This refers to your letter dated December 10, 1997, requesting for a ruling on the tax implications of the equity restructuring of your client, BRISTOL MYERS SQUIBB (Philippines),INC.,resulting from transactions which ultimately transferred 8% of its shares to Bristol Myers-Squibb Company (BMS-US). It is represented that BRISTOL MYERS SQUIBB (Philippines),INC. (BMS-Phils.) is corporation organized and existing under Philippine Laws with equity structure as follows: fifty-three percent (53%) is owned by BMS-US, a corporation organized and existing under the laws of the State of Delaware, U.S.A.;thirty-nine percent (39%) by Bristol Laboratories International, S.A.,a corporation organized and existing under the laws of the State of Delaware, U.S.A.;six percent (6%) by E.R. Squibb & Sons, Inc. (E.R. Squibb),a corporation organized and existing under the laws of Delaware, U.S.A.;and two percent (2%) by Linson Investments Ltd. (LINSON),a corporation organized and existing under the laws of Cayman Islands; that BMS-US wholly owns Squibb Corporation (SQUIBB),and SQUIBB on the other hand, wholly owns E.R. SQUIBB; that E.R. SQUIBB in turn, wholly owns Swords Laboratories (SWORDS),a corporation organized and existing under the laws of Ireland; and that lastly SWORDS wholly owns LINSON; that to simplify BMS-Phils' current ownership structure, LINSON's and E.R. SQUIBB's respective shares in BMS-Phils. were transferred to BMS-US by way of property dividends; that in view of the existence of intermediate companies between LINSON and E.R. SQUIBB and BMS-US as mentioned above, the following series of transactions were undertaken before the subject BMS-Phils shares were ultimately transferred to BMS-US. a) LINSON transferred its 15,060 shares in BMS-Phils. to SWORDS by declaring said shares as property dividends on October 10, 1997. The documentary stamp tax due on such transfer was paid to the BIR on November 7, 1997. b) SWORDS transferred its 15,060 shares in BMS-Phils. to E.R. SQUIBB by declaring said shares as property dividends on November 18, 1997. The DST due on such transfer was paid on the same date. c) E.R. SQUIBB transferred its 50,119 shares in BMS-Phils. (consisting of the 15,060 shares it received from SWORDS by way of property dividends and the 35,059 shares it originally owned) to SQUIBB by declaring said shares as property dividends on November 24, 1997. The DST due on such transfer was paid on the same date. d) SQUIBB transferred its 50,119 shares in BMS-Philippines to BMS-US by declaring said shares as property dividends on December 9, 1997. The DST due on the transfer was paid on the same date. The Certification and Independent Auditor's Reports prepared for the specific purpose of validating/confirming that no income or minimal income (less than 50% was derived or earned from the Philippine sources) submitted to this Office in support of your request show that: 1. Report of Independent auditor on LINSON, E.R. SQUIBB, and SQUIBB (referred to as "the Company" in the report): the Company did not have income during the fiscal years ended December 31, 1994 through 1997 derived from Philippines' sources, with the exception of $295,812.45 of dividends paid by BMS-Philippines to E.R. SQUIBB in 1996, which represents 0.15% of E.R. SQUIBB's net earnings for 1996. LINSON was inactive during the period from January 1, 1994 through December 31,1997. 2. Certification from Pricewaterhouse Coopers, Dublin 2 Ireland, dated June 17, 2003 on SWORDS' financial statements: Year Rest of the World Total Turnover Rest of the World Turnover ($'000) ($'000) Percentage Contribution to Total Turnover 1997 85,261 996,839 8.55% 1996 96,728 961,886 10.06% 1995 67,271 752,130 8.94% 1994 54,169 664,385 8.15% In connection therewith, you now request for our confirmation of your opinion that LINSON, SWORDS, E.R. SQUIBB and SQUIBB, all foreign corporations, will not be subject to Philippine income tax on the property dividends (consisting of BMS-Phils. shares) they received on the ground that said dividends do not constitute income from Philippine sources pursuant to Section 36(a)(2)(B) of the NIRC [now Section 42 (A)(2)(b) of the Tax Code of 1997]. In reply thereto, please be informed that Section 25(b)(E)(1) of the NIRC [now Section 28(B)(l) of the Tax Code of 1997] provides as follows: "(b) Tax on Non-Resident foreign corporations . (E) Nonresident foreign corporation s. (1) In general . Unless otherwise provided, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 35% of the gross income received during each taxable year from all sources within the Philippines such as interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),annuities, emoluments or other fixed or determinable annual, periodical or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(C). On the other hand, Section 36(a)(2)(B) of the NIRC [now Section 42 (A)(2)(b) of the Tax Code of 1997], provides as follows: "Section 36. Income from sources within the Philippines . (a) Gross income from sources within the Philippines . The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interest ...; (2) Dividends The amount received as dividends; (A) From a domestic corporation; (B) From a foreign corporation unless less than fifty per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this section; but only in an amount which bears the ratio to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources. ...." (emphasis supplied) From the foregoing provisions, dividends received from a foreign corporation are, as a rule, considered Philippine source income and therefore taxable in the Philippines unless the income of the foreign corporation declaring dividends from the Philippines for the three year period preceding the declaration of the dividends constitutes less than 50% of its entire gross income in said years. AECcTS In the instant case, since it can be inferred from the independent auditor's reports submitted to this Office that Philippine source income of LINSON, SWORDS, E.R. SQUIBB and SQUIBB, all foreign corporations, for the three-year period ending with the close of their taxable year preceding the declaration of BMS-Phils. shares as property dividends (or for such part of such period as the corporation has been in existence) constitute less than fifty percent (50%) of their gross income, the 50,119 BMS-Phils. shares which were declared and paid as property dividends in the above series of transactions are, therefore, not considered Philippine source income and are exempt from Philippine income tax. [ BIR Ruling No. 252-91 dated November 10, 1991 and BIR Ruling UN-210-7-13-94 ] 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group