ITAD BIR Ruling No. 009-11

January 19, 2011 ITAD BIR RULING NO. 009-11 Article 10, renegotiated Philippines-Denmark tax treaty Maersk-Filipinas, Inc. 9th Floor, OneE-comCenter Harbor Drive corner Sunset Avenue Mall of Asia Complex, Pasay City Attention: Mr. Anthony A. Chan Tax and Reporting Manager Gentlemen : This refers to your application for relief treaty relief dated July 5, 2010, requesting confirmation that dividends received by MAERSK LINE AGENCY HOLDINGS A/S (Maersk Denmark) from MAERSK FILIPINAS, INC. (Maersk Phils.) are subject to a preferential tax rate of 10 percent pursuant to Article 10 of the renegotiated Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Denmark tax treaty"), which took effect on January 1, 1998) . aTCAcI Facts It is represented that Maersk Denmark is a foreign corporation organized and existing under the laws of Denmark, as evidenced by its Articles of Incorporation, with place of business at Esplanaden 50 1098, Copenhagen, Denmark; that Maersk Denmark is not registered as a corporation or as a partnership in the Philippines based on the Certification dated June 9, 2010 issued by the Securities and Exchange Commission; and that, on the other hand, Maersk Phils. is a domestic corporation situated at 9th Floor One E-Com Center, Harbor Drive corner Sunset Avenue, Mall of Asia Complex, Pasay City, Philippines. It is further represented, based on the Certificate dated May 13, 2010 issued by the Corporate Secretary of Maersk Phils, that on April 20, 2010, at the Joint Annual Stockholders and Board of Directors Meeting of Maersk Phils, the Board passed and approved Board Resolution No. 04-01-10 which called for the declaration of the following cash dividends: a) Cash dividends amounting to PHP35,000,000.00, to be distributed in proportion to the share of each stockholder on record as of March 31, 2010, payable on or before July 31, 2010; b) Cash dividends amounting to PHP5,000,000.00, to be taken out of the cash dividend declaration from Maersk-Filipinas Crewing, Inc. , to be effected on or before June 30, 2010, and to be distributed in proportion to the share of each stockholder on record as of March 31, 2010, payable on or before July 31, 2010; and c) Cash dividends amounting to PHP10,000,000.00, to be taken out of the cash dividend declaration from Mercantile Ocean Maritime Co. (Filipinas), Inc. , to be effected on or before June 30, 2010, and to be distributed in proportion to the share of each stockholder on record as of March 31, 2010, payable on or before July 31, 2010. That Maersk Denmark, being a stockholder on record as of March 31, 2010, and holding 359,990 of the total 360,000 shares of Maersk Phils, is entitled to such dividends; and that based on another Certificate dated June 3, 2010 issued by the same Corporate Secretary, Maersk Denmark holds this number of shares in Maersk Phils. since February 4, 2010 under Stock Certificate No. 158, each share with a par value of PHP100.00. CIHTac It is finally represented that the dividends subject of the request for 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 dated August 26, 2010 issued by the Tax and Reporting Manager of Maersk Phils. Ruling 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 income of 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 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 Tax Code of 1997, as amended, provides that any income may be exempt to the extent required by any treaty obligation binding upon the Government of the Philippines, thus: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross 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. AaDSEC xxx xxx xxx" In this particular case, what you invoked is the renegotiated Philippines-Denmark tax treaty. Article 10 thereof 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. 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 beneficial owner of the dividends is a resident of the other Contracting State 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 (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States may 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." Under paragraph 2 of Article 10, a preferential tax rate on dividends of 10 percent applies when the beneficial owner of the dividends is a company (other than a partnership) which holds directly at least 25 percent of the capital of the company paying the dividends. In all other cases, a tax rate of 15 percent applies. This being the case, and considering that Maersk Denmark holds 359,990 of the total 360,000 shares of Maersk Phils, which represents 99.99 percent ownership and shareholding in Maersk Phils, and which is more than the required minimum of 25 percent, such dividends to be paid by Maersk Phils. to Maersk Denmark are subject to a preferential tax rate of 10 percent pursuant to paragraph 2, Article 10 of the renegotiated Philippines-Denmark tax treaty. AHcCDI This ruling is issued based on facts as represented. However, if upon investigation it shall be disclosed that the facts as 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