DA ITAD BIR Ruling No. 046-09

April 13, 2009 DA ITAD BIR RULING NO. 046-09 Article 9 of the Philippines-United Kingdom tax treaty; ITAD Ruling No. 239-82 Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig City Attention: Atty. Dennis G. Dimagiba Atty. Jose Jaime V. Cruz Gentlemen : This refers to your letter dated 19 October 2007, on behalf of your client, Macquarie International Holdings, Ltd. (MIHL), requesting confirmation that the dividends which MIHL will derive from its shareholdings in Macquarie Securities Philippines, Inc. (MSPI) are subject to 15% preferential income tax pursuant to Article 9 (1) (a) of the Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty (RP-UK tax treaty). It is represented that MIHL is a resident in the United Kingdom and is subject to United Kingdom tax on its total income, per Certificate of Residence in the United Kingdom dated 12 September 2007 by the Tax Specialist-Direct Tax of the Large Business Financial Sector Group; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 17, 2007; that MSPI is a corporation organized and existing under the laws of the Philippines with principal address at 27th Floor, Ayala Tower 1, Ayala Avenue, Makati City. It is further represented that MIHL is a stockholder of record of 4,643,835 common shares of the capital stock of MSPI, or approximately 99.99% of its total issued capital; and is also the beneficial owner of five common shares of MSPI's capital stock; each of which is held in trust by five individuals acting as nominees in favor of MIHL, that MIHL's total investment in MSPI to date is P464,384,000, consisting of 4,643,840 common shares beneficially owned by MSPI, representing 100% of MSPI's total outstanding capital stock; that on October 9, 2007, the Board of Directors of MSPI unanimously passed and approved a resolution declaring cash dividends from MSPI's unrestricted retained earnings to all its stockholders of record as of October 9, 2007, amounting to Two Hundred Fifty Million One Hundred Thousand Pesos (P250,100,000.00), payable on or before October 25, 2007; that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per Sworn Statement issued by MSPI dated October 16, 2007. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended applies in general to interest received by a nonresident foreign corporation which provides: "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, the provisions of Article 9 (1) (a) of the Philippines-United Kingdom tax treaty, which you invoke, may apply to the instant case. It provides "Article 9 Dividends 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; HSCcTD b) in all other cases 25% of the gross amount of the dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company. xxx xxx xxx" Based on the foregoing, dividend payments to a company which is a resident of United Kingdom and which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding fifteen percent (15%) of the gross amount of dividends if the said recipient is a company which owns at least 10 percent of the voting power in the company paying the dividends; and a tax rate not exceeding twenty five percent (25%) of the gross amount of the dividends in all other cases. IEDHAT Such being the case and since MIHL owns 100% of MSPI's total outstanding capital stock and is not registered to engage in business in the Philippines through a permanent establishment situated therein, the dividends to be paid by MSPI to MIHL are subject to the preferential tax rate of 15 percent, based on the gross amount thereof, pursuant to the Philippines-United Kingdom tax treaty. (BIR Ruling No. 239-82 dated August 25, 1982) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the actual 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.) GREGORIO V. CABANTAC Deputy Commissioner