Request for Review of BIR Ruling No. ITAD-168-11 Re: Dividend Payments of BPI/MS Insurance Corp.

September 8, 2011 DOF OPINION BPI/MS Insurance Corporation 11th & 16th Floors, Ayala Life-FGU Center 6811 Ayala Avenue 1226 Makati City Attention: Ms. Merlinda P. Mendoza Chief Finance Officer Gentlemen : This has reference to your request for review of Bureau of Internal Revenue ("BIR") Ruling No. ITAD-168-11 dated June 7, 2011, which held that dividend payments of BPI/MS Insurance Corporation ("BPI/MS") to MSIG Holdings (Asia) Pte. Ltd. ("MSIG") shall be subject to the twenty five percent (25%) preferential tax rate pursuant to Article 10 (2) (b) of 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"), to wit: "In view thereof, considering that the 48.49197% shareholdings of MSIG in BPI/MS were acquired only on January 7, 2009 and not during the year prior to the year of payment of the dividends as required under Article 10(2)(a) of the Philippines-Singapore tax treaty tax, your application for a preferential tax rate of 15 percent to be applied on the dividends paid by BPI/MS to MSIG is hereby denied. However, such dividend payment of BPI/MS to MSIG is qualified for, and shall then be subject to the 25 percent preferential tax rate, pursuant to Article 10(2)(b) of the same tax treaty." As culled from the records, the facts are as follows: On May 29, 2009, the Board of Directors of BPI/MS, a corporation duly organized and existing under the laws of the Philippines, resolved that a cash dividend in the amount of Two Hundred Eighty Five Million Five Thousand Pesos (Php285,005,000.00) or Eighty One Pesos and 43/100 (Php81.43) per share be declared to all BPI/MS stockholders of record as of May 29, 2009 and distributable upon receipt by BPI/MS of the approval by the Insurance Commission of said dividend declaration. Based on a Secretary's Certificate dated May 13, 2009, BPI/MS has Three Million Five Hundred Thousand (3,500,000) subscribed and paid-up shares. As provided in a Secretary's Certificate dated November 30, 2010, MSIG is a stockholder of BPI/MS from January 7, 2009 up to present with stockholdings of One Million Six Hundred Ninety Seven Thousand Two Hundred Nineteen (1,697,219) common (voting) shares, which represents 48.49197% of the total outstanding shares of BPI/MS as a result of transfer of shares of Mitsui Sumitomo Insurance Co., Ltd. ("MSIC"). The cash dividends were paid to the stockholders on November 27, 2009. DCISAE In its Tax Treaty Relief Application dated November 24, 2009, BPI/MS, on behalf of its client, MSIG, requested for confirmation on whether the dividend payments of BPI/MS to MSIG are subject to a preferential tax rate of fifteen percent (15%) based on Article 10 (2) (a) of the Philippines-Singapore Tax Treaty. As above-mentioned, the BIR Commissioner disagreed with the position of BPI/MS and held that the dividend payment of BPI/MS to MSIG is subject to the 25% preferential tax rate pursuant to Article 10 (2) (b) of the Philippines-Singapore Tax Treaty. Hence, this request for review by BPI/MS. In its request for review, BPI/MS claims that MSIG acquired the 1,697,219 shares of BPI/MS from MSIC on December 5, 2007, as evidenced by a Deed of Assignment of the same date. BPI/MS alleged that while the Stock and Transfer Book reflected a belated date of transfer of shares due to the date of the issuance of the Certificate Authorizing Registration and date of the presentation of the documents to the Corporate Secretary, MSIG has become the beneficial owner of the subject shares of stock as of the date of assignment on December 5, 2007, even if its name was not reflected in the STB of BPI/MS. After a careful review of the case records, we see no reason to depart from the findings and conclusions of the Commissioner. Article 10 of the Philippines-Singapore Tax Treaty, provides for the applicable tax in the instant case, as follows: "Article 10 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 the 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 that law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a. 15 percent 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 percent of the outstanding shares of the voting stock of the paying company was owner by the recipient company; and b. In all other cases, 25 percent 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. . . . (Emphasis supplied)." 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% of the outstanding voting shares of the voting stock of paying company, which 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. 1 In general, the beneficial owner of a share of stock is the person who enjoys the benefits ( i.e. , rights to dividends, to vote, to appreciation in value, and to transfer rights of ownership) and bears the risk of loss with respect to the shares of stock. 2 As certified by its Corporate Secretary on November 30, 2010, MSIG is a stockholder of BPI/MS from January 7, 2009 up to present with a stockholdings of 1,697,219 common (voting) shares which represents 48.49% of the total outstanding shares of BPI/MS as a result of the transfer of shares of MSIC. The pertinent provision with respect to transfer of shares of stock is Section 63 of the Corporation Code, 3 to wit: DHITcS "Section 63. Certificate of Stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner of his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of transfer, the number of certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (Emphasis supplied)" 4 In the instant case, although the Deed of Assignment was dated December 5, 2007, it was only on January 7, 2009 that the transfer of shares from MSIC to MSIG was recorded in the Stock and Transfer Book of BPI/MS. The transfer became valid against the corporation and third parties with the corollary rights accruing to MISG on the date of the entry of its name in the books of the BPI/MS or on January 7, 2009. As cited in the case of Garcia v. Jomouad 5 quoting the case of Uson v. Diosomito , "all transfers of shares should be entered, as here required, on the books of the corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as to the attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the parties to such transfers." Further, as opined by the Securities and Exchange Commission, "to make a transfer of ownership of shares valid as against the corporation and third parties, the same must be recorded in the corporate books. An unrecorded transferee cannot enjoy the status and rights of the stockholder." 6 Since the dividends were paid on November 27, 2009, as per Secretary's Certificate dated November 30, 2010, MSIG should have owned 15% of the outstanding shares of the voting stock of BPI/MS (1) during the period of the year 2009 preceding the date of the payment of the dividend and (2) during the whole of the year 2008. In view of the fact that the transfer of shares between MSIC and MSIG was only recorded in the Stock and Transfer Book on January 7, 2009, the transfer of shares between MSIG and MSIC only became valid against the corporation and third parties as of said date. Thus, the requirements of Article 10 (2) (a) for the preferential tax rate of 15% have not been met. However, as held by the Bureau of Internal Revenue, such dividend payment of BPI/MS to MISG is qualified for, and shall then be subject to the 25% preferential tax rate, pursuant to Article 10 (2) (b) of the Philippines-Singapore Tax Treaty. Based on the foregoing, we hereby affirm the ruling of the Commissioner in its entirety. Considering that the 48.49197% shareholdings of MSIG in BPI/MS were acquired only on January 7, 2009 and not during the year prior to the date of payment of the dividends as required under Article 10 (2) (a) of the Philippines-Singapore Tax Treaty, the cash dividends paid by BPI/MS to MISG shall be subject to the preferential tax rate of 25%, based on the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Singapore Tax Treaty. EHSADa Very truly yours, (SGD.) CESAR V. PURISIMA Secretary Footnotes 1. BIR Ruling DA ITAD No. 090-08, November 5, 2008. 2. BIR ITAD Ruling No. 106-03, July 29, 2003. 3. Batas Pambansa Bilang 68, The Corporation Code of the Philippines, May 1, 1980. 4. Supra , Batas Pambansa Bilang 68. 5. Garcia v. Jomouad et al. , G.R. No. 133969, January 26, 2000. 6. SEC Opinion dated February 10, 1993 addressed to Mr. Vincent A. Flores.