Guidelines in the Importation, Facilitation and Management of Foreign Donations Involving Health and Health-Related Products

December 18, 2014 ITAD BIR RULING NO. 328-14 Article 10 (Dividends) Philippines-Switzerland tax treaty Castillo Laman Tan Pantaleon and San Jose Law Firm The Valero Tower, 122 Valero Street Salcedo Village, Makati City Attention: Ms. Maria Victoria D. Sarmiento Legal Counsel Gentlemen : This refers to your tax treaty relief application filed on October 16, 2013 requesting confirmation on your opinion that the dividends paid by Firmenich Philippines, Inc. ("Firmenich-Philippines") to Firmenich Trading Corporation ("Firmenich") are subject to preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). Facts Firmenich is a foreign corporation and a resident of Switzerland based on its amended Articles of Association and Certificate of Residence issued by the Tax Administration of Switzerland on September 26, 2013. Firmenich is located at Route des Jeunes 1, 1227 Geneva, Switzerland. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on August 15, 2013. On the other hand, Firmenich-Philippines is a domestic corporation located at 2nd Floor, UPRC III Building, 2289 Pasong Tamo Extension, Makati City, Philippines. Based on the Secretary's Certificate issued on October 14, 2013, the Board of Directors of Firmenich-Philippines, during a special meeting on September 25, 2013, declared cash dividends amounting to P35,800,000.00 in favor of the company's stockholders of record as of September 25, 2013, and payable not later than December 31, 2013. As of record date on September 25, 2013, Firmenich holds 100 percent of the common shares of stock of Firmenich-Philippines, inclusive of shares held in trust by its five (5) directors, as described below: ITAaCc Number and Mode of Percentage Stockholder Value of Shares Acquisition Acquisition Date of Ownership Firmenich 130,745 Original August 5, 1996 & 100 percent Trading subscription March 1, 1996 Aamir Akhtar Aziz 1 Trust September 15, 2011 Jacinta Javier- 1 Trust June 1, 2001 Macapugay Matthew Furner 1 Trust September 20, 2007 Noel A. Laman 1 Trust August 5, 1996 Alvin O. Geli 1 Trust May 25, 2007 Total 130,750 - - (P13,075,000.00) ============= Based on the Sworn Certification and Debit Advice issued by Citibank N.A. Manila 1 on December 19, 2013, the dividends were remitted by Firmenich-Philippines to Firmenich on December 19, 2013. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: DIECTc "SEC. 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." In this particular case, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: ASIETa "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 also be taxed in the Contracting 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 percent of the gross amount of the dividends in all other cases. 3. The term "dividends" as used in this Article means income from shares or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident." Based on the above quoted provisions, dividends arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company (excluding partnerships) which holds directly at least 10 percent of the capital of the company paying the dividends, and 15 percent in all other cases. Accordingly, inasmuch as Firmenich is a company in Switzerland which holds directly at least 10 percent of the capital of Firmenich-Philippines and where Firmenich holds 100 percent of these shares, such dividend paid by Firmenich-Philippines to Firmenich shall be subject to income tax rate of 10 percent, pursuant to paragraph 2 (a), Article 10 of the Philippines-Switzerland tax treaty. CSIcHA 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, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue Footnotes 1. Located at 8741 Paseo de Roxas, Makati City, Philippines. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.