ITAD BIR Ruling No. 005-12

January 10, 2012 ITAD BIR RULING NO. 005-12 Article 9, Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty; BIR Ruling No. 070-81; BIR Ruling No. 044-82; BIR Ruling No. 278-82; BIR Ruling No. 157-83; BIR Ruling No. 013-97 Puyat Jacinto & Santos Law Office 12th Floor, VGP Center 6772 Ayala Avenue, Makati City Attention: Atty. Virginia B. Viray Atty. Joseph Anthony F. Boma Gentlemen : This refers to your letter dated April 15, 2010, requesting confirmation that dividends paid by ENERGY DEVELOPMENT CORPORATION ("Energy Development") to MORGAN STANLEY & COMPANY INTERNATIONAL PLC ("Morgan Stanley") , 1 are subject to income tax at the reduced rate of 25 percent pursuant to 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") . CAHTIS It is represented that Morgan Stanley is a corporation organized and existing under the laws of the United Kingdom, based on its Memorandum and Articles of Association and on its Certificate of Incorporation, as amended; that Morgan Stanley is situated at 25 Cabot Square, Canary Wharf, London E14 4QA, England, United Kingdom; that Morgan Stanley is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 16, 2009; and that, on the other hand, Energy Development is a domestic corporation situated at Building 5, Energy Center, Merritt Road, Fort Bonifacio, 1200 Taguig City, Philippines. It is further represented that on March 25, 2010, the Board of Directors of Energy Development, at its meeting, declared cash dividends of Php0.0008 per share in favor of the preferred stockholders of record of Energy Development as of April 13, 2010, and cash dividends of Php 0.12 per share in favor of the common stockholders of record of Energy Development as of April 13, 2010, based on the Certificate issued by the Assistant Corporate Secretary of Energy Development on April 8, 2010; that the dividends will be taken out of the unrestricted retained earnings of Energy Development as of December 31, 2009, and payable on or before April 30, 2010; that Morgan Stanley holds 25,882,986 common shares of Energy Development representing 0.000863 percent of the capital stock of Energy Development, based on the Certification issued by the Assistant Vice President of Hong Kong & Shanghai Banking Corporation Ltd. 2 on April 15, 2010. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the Comptroller of Energy Development on May 19, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to Morgan Stanley , a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 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): 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 Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: TAECaD 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" Thus, you invoke the Philippines-United Kingdom tax treaty. Paragraph 1, Article 9 thereof 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: 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" Based on the foregoing, dividends arising in the Philippines and paid to it to a resident of the United Kingdom may be taxed in the Philippines at a reduced rate of: (a) 15 percent of the gross amount of dividends if the company recipient of the dividends controls directly or indirectly 10 percent of the voting power of the company paying the dividends; and (b) 25 percent of the gross amount of the dividends in all other cases. In view thereof, and considering that Morgan Stanley does not control directly or indirectly at least 10 percent of the common (voting) shares of stock of Energy Development, this Office is of the opinion and so holds that dividends paid by Energy Development to Morgan Stanley are subject to income tax at the preferential rate of 25 percent of the gross amount thereof, pursuant to paragraph 1 (b), Article 9 of the Philippines-United Kingdom tax treaty. (BIR Ruling No. 070-81 dated April 8, 1981; BIR Ruling No. 044-82 dated February 24, 1982; BIR Ruling No. 278-82 dated October 14, 1982; BIR Ruling No. 157-83 dated August 2, 1983; BIR Ruling No. 013-97 dated February 5, 1997) 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 of Internal Revenue Footnotes 1. [Originally (Morgan Stanley International Holdings Ltd.), then Morgan Stanley & Co. International Ltd. ] 2. Situated at 12th Floor The Enterprise Center, Tower I, 6766 Ayala Avenue corner Paseo de Roxas, Makati City, Philippines.