DOJ Opinion No. 235, s. 1989

April 13, 2011 ITAD BIR RULING NO. 124-11 Article 9, Philippines-United Kingdom tax treaty; BIR Ruling No. 278-82; BIR Ruling No. DA-ITAD 93-07 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Carlos Hilario Mateo Gentlemen : This refers to your Tax Treaty Relief Application filed on December 16, 2010, on behalf of your client, INTERNATIONAL FLAVORS & FRAGRANCES (PHILIPPINES), INC. ("IFF Phils.") , requesting confirmation that the dividends to be paid by IFF Phils. to A. BOAKE ROBERTS & CO. (HOLDINGS) LTD. ("ABR UK") are subject to the preferential tax rate of 15 percent pursuant to Article 9 of the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-United Kingdom tax treaty") . ITaESD It is represented that ABR UK is a nonresident foreign corporation organized and existing under the laws of United Kingdom with registered office address at Duddery Hill Haverhill Suffolk CB9 8LG; that ABR UK is a resident of the United Kingdom within the meaning of Article 4 of the Philippines-United Kingdom tax treaty per Certificate of Residence issued by the HM Revenue & Customs, Local Compliance, Large and Complex dated October 5, 2010; that ABR UK is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated November 10, 2010; and that, on the other hand, IFF Phils. is a domestic corporation engaged in the manufacture, distribution and sale, on a wholesale basis, of compound flavourings, essences, spice products and other product lists, with office address at 28th Floor Wynsum Corporate Plaza, 22 F. Ortigas Jr. Road, Ortigas Center, Pasig City. It is also represented that based on the records of IFF Phils., ABR UK is the registered owner of 8,147,603 shares of voting capital stock of IFF Phils., and that the aforementioned shares represent 70% of the outstanding capital stock of IFF Phils. per Secretary's Certificate dated February 14, 2011; that at the special meeting of the Board of Directors of IFF Phils. held on December 13, 2010, it was resolved that a cash dividend out of IFF Phils.' unrestricted retained earnings as of December 31, 2009 and June 30, 2010 amounting to Ten Million Six Hundred Fifteen Thousand Six Hundred Seventy-Eight Pesos (Php10,615,678) and Sixty-Two Million Five Hundred Eighty-Seven Thousand Two Hundred One Pesos (Php62,587,201), respectively, be paid to IFF Phils.' stockholders of record as of June 30, 2010, payable on December 21, 2010; and that, per Sworn Statement of IFF Phils. dated December 13, 2010, the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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, to dividends derived in the Philippines by a nonresident foreign corporation. 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 this particular case, the treaty involved is the Philippines-United Kingdom tax treaty, which, in its Article 9, provides: "Article 9 DIVIDENDS 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: DHEACI a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. xxx xxx xxx 4. 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 corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company. 5. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on a trade or business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Article 7 or 13, as the case may be, shall apply. xxx xxx xxx" Based on the above provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of United Kingdom at a rate not exceeding 15% of the gross amount dividends if the latter holds directly or indirectly at least 10% of the voting capital stock of the first-mentioned company. In all other cases, the 25% preferential tax rate shall apply. In view of the foregoing, since ABR UK owns 70% of the outstanding voting capital stock of IFF Phils., the paying corporation, this Office is of the opinion and so holds that the cash dividends to be paid by IFF Phils. to ABR UK are subject to the preferential rate of 15% withholding tax pursuant to Article 9 (1) (a) of the Philippines-United Kingdom tax treaty. (BIR Ruling No. 278-82 dated October 14, 1982; BIR Ruling No. DA-ITAD 93-07 dated September 24, 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. DISHEA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue