DA ITAD BIR Ruling No. 079-08

October 29, 2008 DA ITAD BIR RULING NO. 079-08 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. DA-ITAD-26-06 Cochingyan & Peralta Law Offices Twelfth Floor, 139 Corporate Center 139 Valero Street Salcedo Village Makati City 1227, Philippines Attention: Jose Cochingyan, III Gentlemen : This refers to your application for relief from double taxation dated September 18, 2006, on behalf of your client Rohde & Schwarz Regional Headquarters Singapore Pte. Ltd. (Rohde Singapore), requesting confirmation of your opinion that the dividends paid by Rohde & Schwarz (Philippines) Inc. (Rohde Philippines) are subject to the preferential tax rate of 15% pursuant to the Philippines-Singapore tax treaty. ACETSa It is represented that Rohde Singapore is a foreign company duly organized and existing under the laws of Singapore with office address at No. 1 Kaki Bukit View, #04-05/07 Techview, Singapore (415941) as evidenced by a certified true copy of its Memorandum and Articles of Association; 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 July 27, 2006; that Rohde Philippines is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at Suite 2301 PBCOM Tower, 6765 Ayala Avenue, Makati City, Philippines. It is also represented that Rohde Philippines has a total of One Hundred Seven Thousand Seven Hundred Sixty Seven (107,767) issued and outstanding shares of capital stock, with par value of One Hundred Pesos (PhP100.00) per share; that during the part of the taxable year which precedes the payment of the dividends (declared on June 28, 2006) and during the whole of the prior taxable year, Rohde Singapore is the principal stockholder of Rohde Philippines, holding One Hundred Seven Thousand Seven Hundred Sixty Two (107,762) paid-up shares out of One Hundred Seven Thousand Seven Hundred Sixty Seven (107,767) total issued and outstanding capital stock, at a total amount of Ten Million Seven Hundred Seventy Six Thousand Seven Hundred Sixty Two Pesos (PhP10,776,762.00); that Rohde Singapore thus represents more than 99.99% of the outstanding shares of stock of Rohde Philippines, per Secretary's Certificate dated November 27, 2006 by Rohde Philippines' Corporate Secretary; that on June 28, 2006, the Board of Directors of Rohde Philippines authorized the declaration of cash dividends from the surplus retained earnings of Rohde Philippines accumulated as of fiscal year ending June 30, 2005 in the total amount of Five Million Pesos (PhP5,000,000.00), to the stockholders of record as of September 20, 2006, payable immediately; and that the issue/s 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. In reply, please be informed that the 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). 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: EaHcDS 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 accordance with the foregoing, Article 10 of the Philippines-Singapore tax treaty, which provides as follows, applies to the subject transaction: "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 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. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to 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 provisions, the 15% preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividends owns at least 15% percent of the outstanding voting shares of the paying company, which fifteen percent (15%) shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. AICHaS Since Rohde Singapore held 99.99% percent of the total outstanding shares of stock of Rohde Philippines during the part of the taxable year which precedes the payment of dividends and the whole of its prior taxable year, dividends received by Rohde Singapore shall be subject to the preferential tax rate of 15%, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD-26-06 dated March 16, 2006) This ruling is issued based on 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner