DA ITAD BIR Ruling No. 057-10

June 4, 2010 DA ITAD BIR RULING NO. 057-10 Article 10, Philippines-France Tax Treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD-017-01; BIR Ruling No. DA-ITAD-004-02; BIR Ruling No. DA-ITAD-064-03; BIR Ruling No. DA-ITAD-196-03; BIR Ruling No. DA-ITAD-101-04 Sanofi-Aventis Philippines, Inc. 3F Feliza Bldg., 108 V.A. Rufino St. Legaspi Village, 1229 Makati City Attention: Ms. Gladys M. Solidum Compliance Manager Gentlemen : This refers to your letter dated September 15, 2009, requesting for confirmation of your opinion that the dividend payments received by SANOFI-AVENTIS PARTICIPATIONS (SAP) from SANOFI-AVENTIS PHILIPPINES, INC. (SANOFI-Phils.) are subject to ten percent (10%) preferential tax rate pursuant to Article 10 of the Philippines-France tax treaty. It is represented that SAP is a nonresident corporation organized and existing under the laws of France as evidenced by its Articles of Incorporation; that its principal office is located at 174 avenue de France, 75013 Paris, France; that SAP is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership dated September 10, 2009 issued by the Securities and Exchange Commission of the Philippines; that SANOFI-Phils. is a domestic corporation with principal address at 3F Feliza Bldg. 108 V.A. Rufino St., Legaspi Village, 1229 Makati City. It is further represented that on September 8, 2009, SANOFI-Phils. declared a cash dividend amounting to TWO HUNDRED MILLION PESOS (Php200,000,000.00) which will be payable on October 15, 2009; that SAP has been a stockholder of SANOFI-Phils. since December 12, 2005 and that it owns One Million Four Hundred Thirty Six Thousand One Hundred Sixty Seven (1,436,167) shares, including four (4) qualifying shares held by its four (4) nominee directors as evidenced by the duly notarized Secretary's Certificates issued by the Corporate Secretary of SANOFI-Phils. both dated September 14, 2009; and that the issue or transaction subject of the above application 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. 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. It 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). ADCEaH xxx xxx xxx 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" In this particular case, the treaty involved is the Philippines-France tax treaty which, in its Article 10 provides as follows: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 25 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as 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" In accordance with the foregoing, the 15% preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividends owns at least 10% of the voting shares of the paying company. However, Article 5 of the Protocol amending the foregoing provisions, which took effect on January 1, 2000, reads as follows: "Article 5 In Article 10 of the Convention: in paragraph 2, the rates of '15 percent' and '25 percent' are replaced respectively by '10 percent' and '15 percent';" Based on the aforequoted provisions of the Protocol, dividends paid by SANOFI-Phils. to SAP are subject to 10% final withholding tax of the gross amount of dividends considering that the transaction transpired after the effectivity of the Protocol and SAP is the holder and beneficial owner of more than 10% of the voting shares of SANOFI-Phils. since December 12, 2005. (BIR Ruling No. ITAD-017-01 dated February 19, 2001; BIR Ruling No. DA-ITAD 196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-004-02 dated January 11, 2002; BIR Ruling No. DA-ITAD-064-03 dated April 25, 2003; BIR Ruling No. DA-ITAD-196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-101-04 dated September 13, 2004) 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, then this ruling shall be without force and effect insofar as the herein parties are concerned. IHSTDE Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group