DA ITAD BIR Ruling No. 100-09

November 9, 2009 DA ITAD BIR RULING NO. 100-09 Article 10 (2), Philippines-Netherlands Tax Treaty; Section 32 (B) (5), NIRC of 1997; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-28-99; BIR Ruling No. DA-ITAD-82-07; BIR Ruling No. DA-ITAD-105-07; BIR Ruling No. DA-ITAD-108-07 Tolentino De Veyra & Co. 42A ZETA 2 Bldg. 191 Salcedo Street, Legaspi Village Makati City Attention: Atty. Ferdinand D. Tolentino Partner Gentlemen : This refers to your letter dated 14 November 2008, on behalf of Sykes Netherlands, B.V. (formerly known as 'McQueen Benelux B.V.' and hereinafter referred to as "Sykes BV" ) requesting for the application of the 10 percent preferential rate on the dividends paid by Sykes Asia (hereinafter referred to as " Sykes Asia ") pursuant to 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 1 (hereinafter referred to as the " Philippines-Netherlands tax treaty "). It is represented that Sykes BV is a private limited liability company organized and existing under the laws of The Netherlands with registered address at Naritaweg 70, 1043BZ Amsterdam as evidenced by the authenticated copies of its Articles of Incorporation, Amendment to its Article of Incorporation and Registration with the Trade Register of the Chamber of Commerce of Sykes BV; that Sykes BV is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration/Partnership issued by the Securities and Exchange Commission (SEC) on 11 September 2008; and that as of 10 October 2008, Sykes BV holds 99.99% of the capital of Sykes Asia, with 9,999,033 shares, having a value of Php999,903,300.00 registered under its name as evidenced by the duly sworn Secretary's Certificate of (Sykes Asia) dated 20 October 2008. It is further represented that at a special meeting of the Board of Directors of Sykes Asia on 12 September 2008, and as evidenced by the Secretary's Certificate dated 9 October 2008, the Board unanimously resolved to partially reverse its Resolution dated 30 January 2007 insofar as it appropriated Two Hundred Fifty Million Pesos (PhP250,000,000.00) for the business expansion of Sykes Asia for 2007; that the Board further resolved that the said PhP250,000,000.00 appropriation be reverted back to the unrestricted retained earnings of Sykes Asia as of 2008; that Sykes Asia finally resolved to issue cash dividends as follows: 1) from the unrestricted retained earnings ending 31 August 2008, Two Billion and Four Hundred Million Pesos (PhP2,400,000,000.00) be declared and issued on 10 October 2008; 2) from the unrestricted retained earnings ending 30 September 2008, Three Hundred Million Pesos (PhP300,000,000.00) be declared and issued on 23 October 2008; 3) from the unrestricted retained earnings ending 30 November 2008, Three Hundred Million Pesos (PhP300,000,000.00) be declared and issued on 17 December 2008; AICTcE that the unrestricted retained earnings are not expected to be impaired by losses that Sykes Asia may suffer during the remaining period of the fiscal year, and such cash dividends shall be issued in favor of Sykes Asia stockholders of records as of 30 September 2008, in proportion to the stockholder's respective shareholdings, provided that any cash dividends due on any delinquent stock be first applied to any unpaid balance of the subscription; and that the issues 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 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: 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-Netherlands tax treaty provides as follows, viz. : "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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 5. 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. aSACED xxx xxx xxx" Based on the aforequoted Article 10, the 10 percent preferential tax rate on dividends shall apply 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. Firstly, Sykes Asia , the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Sykes BV, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, Sykes Asia is deemed a domestic corporation, while Sykes BV is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, Sykes Asia 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, Sykes BV, 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, Sykes BV is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated 20 October 2008. Fifthly, the capital of Sykes BV is wholly divided into shares, based on a copy of the Article of Association and the Amendment of the Memorandum and Articles of Associations of Sykes BV. Lastly, Sykes BV directly holds 99.99% capital shares of Sykes Asia , per Secretary's Certificate dated 20 October 2008 issued by the Corporate Secretary of Sykes Asia , or more than the required stockholdings of 10%. Thus, this Office is of the opinion and so holds that the dividends paid by Sykes Asia to Sykes BV shall be subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling Nos.: ITAD-99-08 dated 17 November 2008; ITAD-28-99 dated 7 October 1999; DA-ITAD-82-07 dated 11 July 2007; DA-ITAD-105-07 dated 16 November 2007; and DA-ITAD-108-07 dated 16 November 2007) ITAaHc 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Effective 01 January 1992.