DA ITAD BIR Ruling No. 132-06

October 27, 2006 DA ITAD BIR RULING NO. 132-06 Article 10 (2) (a), Philippines-Netherlands tax treaty; ITAD Ruling No. 28-99; BIR Ruling No. 559-88 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Attention: W.U. Villanueva Principal, Tax Services Gentlemen : This refers to your application for relief from double taxation dated June 26, 2006, on behalf of your client, Diageo Philippines, Inc. (DPI), requesting confirmation of your opinion that the dividend payments of DPI to Selviac Nederland B.V. (Selviac) are subject to a 10% preferential withholding tax rate, pursuant to Article 10(2) of the Philippines-Netherlands tax treaty. It is represented that Selviac is a nonresident foreign corporation organized and existing under the laws of The Netherlands with office address at Molenwerf 10-12, 1014 BG Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per Certification dated June 23, 2006 issued by the Securities and Exchange Commission; that DPI is a corporation duly organized and existing under laws of the Philippines, with principal office and place of business at 23rd Floor, The Enterprise Center, Ayala Avenue, Makati City 1226, Philippines. It is further represented that DPI has an authorized capital stock of Fifty Million Pesos (P50,000,000.00) divided into Five Hundred Thousand (500,000) shares with a par value of One Hundred Pesos (PhP100.00) per share; that out of 500,000 DPI shares, Two Hundred Eighty Two Thousand Five Hundred (282,500) shares have been issued and outstanding; that Selviac is the registered owner of One Hundred Forty Four Thousand Seventy Two (144,072) common shares of DPI with a par value of One Hundred Pesos (PhP100.00) per share or an aggregate value of Fourteen Million Four Hundred Seven Thousand Two Hundred Pesos (PhP14,407,200.00) representing 50.99% of the total amount subscribed and paid up shares in DPI; that on February 15, 2006, the Board of Directors of DPI declared cash dividends in the amount of Three Hundred Twenty Million Nine Hundred Thirty Four Thousand One Hundred Twenty Five Pesos (PhP320,934,125.00), to be distributed among DPI's stockholders of record as of December 30, 2005 pro-rata to the number of shares held by them as of December 30, 2005, payable on a date not earlier than March 31, 2006 but not later than December 31, 2006; 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 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. EaISTD 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 leas 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 4. 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 apply whenever the beneficial owner of the dividend owns directly at least 10 percent of the capital of the paying company. In all other cases, the 15 percent preferential tax rate applies. Such being the case and considering that Selviac holds more than 10% of the capital of DPI, this Office is of the opinion and so holds that the dividend payments by DPI to Selviac shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Netherlands tax treaty. ( BIR Ruling No. DA-ITAD 28-99; see also BIR Ruling No. 559-88 ) 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