ITAD BIR Ruling No. 014-13

January 31, 2013 ITAD BIR RULING NO. 014-13 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 219-11 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Zyber B. Protacio Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on December 20, 2011 , on behalf of your client, Convergys International B.V. ( "Convergys Netherlands" ), requesting confirmation that the dividend payments of Convergys Philippines Services Corporation ( "Convergys Phils" ) to Convergys Netherlands are subject to the preferential tax rate of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ( "Philippines-Netherlands tax treaty" ). cDEICH Facts It is represented that Convergys Netherlands situated at Graadt van Roggenweg 328, 3531 AH Utrect, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, per Declaration of Residence issued by the Inspector of the Tax Administration of the Netherlands; that Convergys Netherlands is a corporation organized and existing under the laws of the Netherlands with an authorized capital of Ninety Thousand Euros, (EUR90,000), divided into five (5) shares with a nominal value of eighteen thousand euro's (EUR18,000.00) each shares; that Convergys Netherlands is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 28, 2011; and that, on the other hand, Convergys Phils is a corporation organized and existing under the laws of the Philippines with principal address at 6796 Ayala Avenue cor Salcedo St., Legaspi Village, Makati City, Philippines. On December 14, 2011, the Board of Directors of Convergys Phils declared cash dividends of US$10,000,000 to all stockholder of record as of November 30, 2011 to be paid on or before December 30, 2011 per Secretary's Certificate dated December 20, 2011; that as of the date of declaration of the cash dividends and up to the date of the filing of the TTRA, Convergys Phils is the beneficial owner of the 13,033,727 common shares with a par value of P1.00 per share representing 100% of the total shares of Convergys Phils.; and that based on the certification issued by Citibank N.A. Manila, the dividend income of Convergys Netherlands was remitted on December 21, 2011. It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal per sworn statement issued by Convergys Phils dated December 15, 2011. 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 derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations . (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 interest, 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%)." 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." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, may apply to the instant case. It provides: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. CSHEAI 2. However, such dividends may also be taxed in the 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 recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 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. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Such being the case, since Convergys Netherlands holds 100% of the total shares of Convergys Phils, this Office is of the opinion and so holds that the dividend payments by Convergys Phils to Convergys Netherlands shall be subject to the preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. ( BIR Ruling No. ITAD 219-11 dated September 1, 2011 ) This ruling is issued on the basis of the foregoing 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