ITAD BIR Ruling No. 018-11

January 20, 2011 ITAD BIR RULING NO. 018-11 Article 10, Philippines-Germany Tax Treaty; BIR Ruling No. 559-88; BIR Ruling No. ITAD-171-02; BIR Ruling No. ITAD-144-03; BIR Ruling No. ITAD-181-03; BIR Ruling No. ITAD-012-05 Siemens Power Operations, Inc. 1500 MW CCPS, Sta. Rita Batangas City 4200 Attention: Karl Heinz Stieglmaier, EVP & CEO Ulrich Rehmund, EVP, CFO & Treasurer Gentlemen : This refers to your letter dated August 18, 2009 requesting confirmation of your opinion that Siemens Power Operations, Inc. (hereinafter referred to as "SPOI") should withhold ten percent (10%) final tax from the gross amount of dividends it pays to Siemens AG (hereinafter referred to as "Siemens" ) pursuant to Article 10 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital (hereinafter referred to as "Philippines-Germany tax treaty" ). cDECIA It is represented that Siemens , with address at Wittelsbacherplatz 2, 80333 Munchen, Germany, is a resident of the Federal Republic of Germany, registered with the Financial Authorities in Munich under the tax registration number 9143/103/70011 and is subject to unlimited tax liability on its worldwide income earned during the year 2009, as certified by the Finanzamt Munchen fur Korperschaften dated January 13, 2009; that Siemens' license to establish a regional or area headquarters in the Philippines has been cancelled per Certificate of Cancellation of License of a Multinational Company to Establish a Regional Headquarters in the Philippines approved on October 4, 1983 per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated August 6, 2009; that SPOI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with address at 17th Floor, Salcedo Tower, 169 H.V. dela Costa St., Salcedo Village, Makati. It is further represented that during the Special Meeting of the Board of Directors of SPOI on August 14, 2009, a resolution declaring a cash dividend of Euro8,000,000 or Php549,560,000.00 to stockholders of record as of August 14, 2009 was unanimously approved per Corporate Secretary's Certificate issued by SPOI; that Siemens is the legal registered owner of all the issued and outstanding shares of stock of SPOI except for five (5) qualifying shares which are registered in the name of the nominee directors of Siemens in the Board of Directors of SPOI per Corporate Secretary's Certificate issued by SPOI dated August 20, 2009; and that the transaction subject of the herein 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 taxpayers 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. 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, rents, royalties . . .: 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 relation thereto, the provisions of the Philippines-Germany tax treaty may apply to the instant case, Article 10 of which provides as follows: "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. EITcaD 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other 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 income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. ICDSca xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Germany at a rate not exceeding 10% of the gross amount of dividends if the later owns directly at least twenty-five percent (25%) of the capital of the company paying the dividends, and 25% preferential tax rate in all other cases. Such being the case and considering that Siemens is a company which is a resident of Germany and holds directly all the issued and outstanding shares of stock in SPOI, which is more than 25% shareholding requirement to avail of the 10% preferential tax rate, this Office is of the opinion and so holds that the subject dividend payment of SPOI to Siemens is subject to 10% preferential tax rate based on the gross amount of the dividend, pursuant to Article 10 (2) (a) of the Philippines-Germany tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988; BIR Ruling No. DA-ITAD-171-02 dated October 2, 2002; BIR Ruling No. DA-ITAD-144-03 dated September 25, 2003; BIR Ruling No. DA-ITAD-181-03 dated November 25, 2003; BIR Ruling No. DA-ITAD-012-05 dated February 16, 2005) 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