DA ITAD BIR Ruling No. 050-10

May 28, 2010 DA ITAD BIR RULING NO. 050-10 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Jules E. Riego Principal, Tax Services Gentlemen : This refers to your letter dated December 29, 2009, on behalf of your client, TeleTech Offshore Investments, B.V. (hereinafter referred to as "TOBV"), requesting confirmation that dividends paid by TeleTech Customer Care Management Philippines, Inc. (hereinafter referred to as "TTCCMPI") are subject to 10 percent preferential withholding tax rate under the Convention between the Kingdom of The Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-Netherlands tax treaty" ). It is represented that TOBV is a resident of the Netherlands with address at Laan van Vlaanderen 327, 1066 WB Amsterdam, per Declaration of Residence issued by the Tax Customs Administration of the Netherlands dated December 9, 2009; that TOBV was issued a license to transact business in the Philippines on December 7, 2005 under SEC Reg. No. FS2005199864 subject to the condition that it will submit authenticated audited financial statements as of June 30, 2005 within sixty (60) days from approval of the license; that said issued License was revoked on February 16, 2006 for non-compliance with the condition to submit authenticated financial statements, as well as lack of interest to pursue its operations in the country per Certificate of Corporate Filing/Information dated February 9, 2010; that TTCCMPI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines, with office at Bldg. F SM Corp. Offices, SM Central Bus. Park, Bay City, Pasay City. It is further represented, based on the Secretary's Certificate issued by TTCCMPI dated December 21, 2009, that TTCCMPI has a total outstanding capital stock of Ten Million Two Hundred Thousand Pesos (Php10,200,000.00) consisting of One Hundred Two Thousand (102,000) shares with a par value of One Hundred Pesos (Php100.00) per share, and that TOBV acquired shareholdings in TTCCMPI on December 8, 2009 consisting of 102,000 common shares at P100.00 is equivalent to 100% of the total stock of TTCCMPI; that at the Special Meeting of the Board of Directors of TTCCMPI on December 14, 2009, a resolution was unanimously adopted and approved declaring Twenty-Eight Million U.S. Dollars ($28,000,000.00) of the retained earnings of TTCCMPI as cash dividends in favor of all stockholders of record as of December 29, 2009, payable not later than December 30, 2009 per Secretary's Certificate issued by TTCCMPI dated December 23, 2009; and that the issue or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. HCaIDS In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "SEC. 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 same NIRC provides as follows: "SEC. 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." In this case, the tax treaty invoked is the Philippines-Netherlands tax treaty, Article 10 of which provides as follows: "Article 10 Dividends 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provision insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: (1) the payor and recipient of the dividends must be separately treated as a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, (4) the recipient of the dividends is the beneficial owner thereof, (5) the capital of such recipient is wholly or partly divided into shares, and (6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. On the other hand, in applying the 15 percent preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes". For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: "Article 4 Fiscal Domicile 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. SIaHDA Firstly, TTCCMPI, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. TOBV, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, TTCCMPI is deemed a domestic corporation, while TOBV is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, TTCCMPI is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, TOBV, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of The Netherlands. Fourthly, TOBV is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated December 21, 2009. Fifthly, the capital of TOBV is wholly divided into shares, based on a copy of the Articles of Association of TOBV. Lastly, TOBV directly holds 100% common shares of TTCCMPI, per Secretary's Certificate dated December 21, 2009 issued by TTCCMPI, or more than the required stockholdings of 10 percent. Thus, this Office is of the opinion and so holds that subject dividends paid by TTCCMPI to TOBV are subject to tax at the rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD 008-09 dated January 27, 2009; BIR Ruling No. ITAD-040-09 dated March 25, 2009; BIR Ruling No. ITAD-085-09 dated September 10, 2009) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different having a different tax treatment, 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