ITAD BIR Ruling No. 002-09

January 14, 2009 ITAD BIR RULING NO. 002-09 Article 10, Philippines-Switzerland tax treaty Cochingyan & Peralta Law Offices 12th Floor, 139 Corporate Center, 139 Valero Street, Salcedo Village, Makati City 1227, Philippines Attention: Jose Cochingyan III Gentlemen : This refers to your letter dated December 26, 2007, on behalf of your client, Clariant International Ltd. (CIL), requesting application of the preferential tax rate of 10% on the gross amount of dividends to be remitted by Clariant Philippines Corporation (CPC) to CIL pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. AcaEDC It is represented that CIL is registered in Canton Basel-Landschaft under tax register number 11/010-00-44452 and is subject to tax in Switzerland without any restrictions and has been subject to ordinary cantonal, local authority and direct federal tax since the 25th October 1989, per Official confirmation of residence for tax purposes dated 30 October 2007 issued by Mr. Thomas Itten, Department of Withholding Tax, Canton Basel-Landschaft; that its address is at Rothausstrasse 61, 4132 Muttenz, Switzerland; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 10, 2007; that CPC is a corporation organized and existing under the laws of the Philippines with office address at 4/F Optima Bldg., 221 Salcedo Street, Legaspi Village, Makati City, Philippines. It is further represented that as of November 5, 2007, CIL has Six Hundred Sixty-One Thousand Nine Hundred Ninety-Three (661,993) shares, out of the Six Hundred Sixty-One Thousand Nine Hundred Ninety-Eight (661,998) total issued and outstanding common shares of stock of CPC, with a par value of PhP100.00 per share and an aggregate value of Sixty-Six Million One Hundred Ninety-Nine Thousand Three Hundred Pesos (PhP66,199,300.00), representing 99.99% of the outstanding and voting shares of CPC as shown in the certification issued by the Corporate Secretary of CPC dated December 21, 2007; that CPC declared cash dividend amounting to Twelve Million One Hundred Seventy-Four Thousand Sixty & 25/100 Philippine Pesos (PhP12,174,060.25), per Board Resolution No. 2007-1105 dated November 5, 2007, out of the unrestricted retained earnings of CPC as of December 31, 2006, to be paid on November 16, 2007 to stockholders of record as of November 9, 2007. Finally, it is represented 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 Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general to dividends received by a non-resident foreign corporation such as CIL. 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%). cEAaIS 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 accordance with the foregoing, the Philippines-Switzerland tax treaty, particularly its Article 10, may apply to the subject dividends received by CIL. Article 10 provides: "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. aTEADI 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 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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. TAIESD xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Switzerland at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the capital of the first-mentioned company. Such being the case, and considering that CIL held 99.99% percent of the total shares of stock of CPC as of the date of declaration of the subject dividends, this Office is of the opinion and so holds that the dividend payments by CPC to CIL 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-Switzerland tax treaty. 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.) SIXTO S. ESQUIVIAS IV Commissioner of Internal Revenue