DA ITAD BIR Ruling No. 112-09

December 28, 2009 DA ITAD BIR RULING NO. 112-09 Article 10 (2) (a), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-27-07; BIR Ruling No. ITAD-132-06; BIR Ruling No. ITAD-82-07; BIR Ruling No. ITAD 108-07 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1229 Makati City Philippines Attention: Emmanuel C. Alcantara Head, Tax Services Gentlemen : This refers to your letter dated 21 December 2009 filed on behalf of your client, TI (Philippines) Inc. (TIPI) , requesting confirmation that the dividends to be received by Texas Instruments Holland B.V. (TI-Holland) from TIPI are subject to a preferential tax rate of 10% of the gross amount of dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. aEHTSc It is represented that TI-Holland with address at Rutherfordweg 102 3542 CG Utrecht, The Netherlands is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, per Certification dated 23 November 2009 issued by the Inspector of the Tax Administration Oost/kantoor Almelo, the Netherlands; that its authorized share capital consists of Five Hundred Thousand Euros (EUR500,000.00) and is divided into One Thousand (1,000) shares of Five Hundred Euros (EUR500.00) each; that it is not registered either as a corporation or as a partnership in the Philippines as per Certification of Non-Registration of Company dated 22 December 2009 issued by the Securities and Exchange Commission; that TI-Holland is engaged, among others, to import, manufacture, resell and trade in machines, tools, appliances, in particular, electrical and electronic products and the production relative thereto and to perform services in connection therewith; while TIPI is a corporation duly organized and existing under and by virtue of Philippine laws, with principal office address at Baguio City Economic Zone, Loakan Road, Baguio City, Philippines; and that TIPI is primarily engaged in the production and sale of semi-conductor products and other electronic products and components for export. It is further represented that as evidenced by a Certification dated 11 December 2009, issued by the Corporate Secretary of TIPI, TI-Holland has Ten Million Ninety-Nine Thousand Nine Hundred Sixty-Four (10,099,964) shares of stock of TIPI, with a par value of One Hundred Pesos (PhP100.00) per share, amounting to One Billion Nine Million Nine Hundred Ninety-Six Thousand Four Hundred Pesos (Php1,009,996,400.00), representing 99.99% of the total shares issued by TIPI since 11 December 2008; that on 21 December 2009, the Board of Directors of TIPI, declared a cash dividend in the amount of Ten Million US Dollars (US$10,000,000.00), payable to all stockholders of TIPI as of the date of the meeting, as soon as practicable but in any event no later than 31 December 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. In reply, please be informed that under Section 23 (F) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended by Republic Act No. 9337, 1 a foreign corporation like TI-Holland, whether or not engaged in trade or business in the Philippines, is taxable only on income derived from sources in the Philippines. Section 23 (F) provides: aTCAcI "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." Income derived by TI-Holland from sources in the Philippines is generally subject to income tax at the rate of 30 percent based on the gross amount thereof under Section 28 (B) (1) of the Tax Code of 1997, as amended. Section 28 (B) (1) 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, under Section 32 (B) (5) of the Tax Code of 1997, such income derived by TI-Holland in the Philippines may be exempt from income tax if the same is so exempt (or partially exempt ) pursuant to a treaty obligation binding upon the Philippine government. Section 32 (B) (5) 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. DcHaET xxx xxx xxx" With respect to a treaty that may be invoked by TI-Holland, there is the Philippines-Netherlands tax treaty. In accordance with the foregoing, the Philippines-Netherlands tax treaty, particularly its Article 10 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 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. xxx xxx xxx" Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever 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. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that TI-Holland is a company wholly divided into shares having an entire issued share capital amounting to Five Hundred Thousand Euros (EUR500,000.00) and is divided into One Thousand (1,000) shares of Five Hundred Euros (EUR500.00) each, and holds 99.99% of the capital of TIPI, this Office is of the opinion and so holds that the dividend payments by TIPI pertaining to TI-Holland shall be subject to a preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated 17 November 2008; BIR Ruling No. ITAD-27-07 dated 21 February 2007; BIR Ruling No. ITAD-132-06 dated 27 October 2006; BIR Ruling No. ITAD-82-07 dated 11 July 2007; BIR Ruling No. ITAD-108-07 dated 16 November 2007) 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. cHDEaC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Entitled an Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes), which was signed on May 24, 2005, and effective November 2005.