DA ITAD BIR Ruling No. 060-10

June 16, 2010 DA ITAD BIR RULING NO. 060-10 Article 10 (Dividends) Philippines-Singapore tax treaty; BIR Ruling No. 10-84; BIR Ruling No. DA-ITAD 25-10; BIR Ruling No. DA-ITAD 12-10; BIR Ruling No. DA-ITAD 9-10; BIR Ruling No. DA-ITAD 90-08 Manabat Delgado Amper & Co. 5th Floor, Salamin Building 197 Salcedo Street, Legaspi Village Makati City Attention: Atty. Elaine E. de Guzman Assistant Manager Atty. Richard R. Lapres Partner Tax and Corporate Services Gentlemen : This refers to your letter dated April 1, 2009 requesting confirmation that dividends paid by AFS Philippines, Inc. (AFS Philippines) to Amstel Financial Services (S) Pte., Ltd. (Amstel) are subject to income tax in the Philippines at a rate not to exceed 15 percent based on the gross amount thereof pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Singapore tax treaty). 1 Basic Facts It is represented that Amstel is a foreign corporation organized and existing under the laws of Singapore and is a resident thereof based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore dated February 20, 2009; that based on the same certificate, Amstel is situated at 80 Raffles Place, 58-01 Clifford Center, Singapore 048624; that Amstel is not registered as a corporation or as partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission (SEC) dated May 6, 2009; that, on the other hand, AFS Philippines is a domestic corporation situated at Unit 2802, Antel 2000 Corporate Center, 121 Valero Street, Salcedo Village, Makati City, Philippines; and that based on its Amended Articles of Incorporation dated August 16, 2006 (which was duly approved by the SEC on March 16, 2009), the primary purpose of AFS Philippines is to provide money and government securities brokering, and specialized and independent brokering services to commercial banks, investment banks and other liquidity providers that trade in the wholesale financial markets, to operate as a broker between market participants in transactions involving, but not limited to, foreign exchange, including foreign exchange swaps, interest rate instruments, including interest rate swaps, fixed income securities, bonds/bills, repurchase agreements or fixed income securities, and all related, similar or derivative products, without taking or receiving investments from the public. It is also represented that the authorized capital stock of AFS Philippines is PHP10,230,000.00, divided into 10,230,000 shares, each share with a par value of PHP1.00; and that aAHTDS 1. As of November 17, 2008, 10,229,995 of the 10,230,000 outstanding shares of stock of AFS Philippines (equivalent to 99.99 percent) are subscribed and fully paid by Amstel, each share with a par value of PHP1.00 or amounting to PHP10,229,995.00. 2. On November 17, 2008, the Board of Directors of AFS Philippines approved a resolution declaring cash dividends amounting to PHP9,088,159.00 in favor of the stockholders of record as of that date, and that on May 15, 2009, the cash dividends were paid to Amstel through its bank, Deutsche Bank of Singapore, based on the Secretary's Certificate dated January 25, 2010. 3. Amstel owns at least 15 percent of the outstanding shares and the voting stock of AFS Philippines based on the Secretary's Certificate dated January 25, 2010. It is finally represented based on the notarized Certification executed by the Corporate Secretary of AFS Philippines dated March 11, 2009, that the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling A. On income tax In reply, please be informed that a foreign corporation like Amstel, whether or not engaged in trade or business in the Philippines, is subject to income tax in the Philippines only with respect to income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what is being invoked for this purpose is the Philippines-Singapore tax treaty. Paragraphs 1 and 2, Article 10 thereof provide 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 (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of ( sic ) the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. xxx xxx xxx" Under paragraph 2 of Article 10, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 15 percent of the gross amount of the dividends if the recipient is a company (including a partnership) which holds at least 15 percent of the outstanding shares or the voting stock of the company paying the dividends during the part of the company's taxable year which precedes the date of payment of the dividends and during the whole of its prior taxable year (if any); and (b) 25 percent of the gross amount of the dividends in all other cases. Accordingly, the cash dividends declared by AFS Philippines on November 17, 2008, and paid on May 15, 2009, amounting to PHP9,088,159.00, in favor of Amstel shall be subject to income tax in the Philippines at the rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2, Article 10 of the Philippines-Singapore tax treaty. The lower rate applies since Amstel has been holding 99.99 percent of the outstanding shares or the voting stock of AFS Philippines during the part of the latter's taxable year in 2009 which precedes the date of payment of the dividends on May 15, 2009, and during the whole of its prior taxable year in 2008. (BIR Ruling 10-84 dated January 19, 1984; BIR Ruling No. DA-ITAD 25-10 dated February 19, 2010; BIR Ruling No. DA-ITAD 12-10 dated February 1, 2010; BIR Ruling No. DA-ITAD 9-10 dated February 1, 2010; and BIR Ruling No. DA-ITAD 90-08 dated November 5, 2008.) 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. STADIH Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Footnotes 1. Signed on August 1, 1977, and effective January 1, 1977.