ITAD BIR Ruling No. 020-12

January 16, 2012 ITAD BIR RULING NO. 020-12 Article 10 (2) (a) Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 029-10 Siguion Reyna Montecillo & Ongsiako 4th & 6th Floors, Citibank Center 8741 Paseo de Roxas Makati City Attention: Atty. Ferdinand M. Hidalgo Atty. Ma. Corazon U. del Castillo Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on July 25, 2011 requesting confirmation that the withholding tax rate on the dividends paid to Swedish Match Group B.V. ("SMG") by Swedish Match Philippines, Inc. ("SMP") is 10 percent pursuant to Article 10 (2) (a) of the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . 1 DETACa It is represented that SMG is a corporation duly organized and existing under the laws of the Netherlands with principal business address at Kennedyplein 201 5611 ZT Einhoven, Netherlands based on the Declaration of Residence issued by the Tax Administration Rivierenland/kantoor Arnhem of the Netherlands dated March 28, 2011; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company dated March 22, 2011 issued by the Securities and Exchange Commission; and that SMP, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with business address at 104 Technology Avenue, Laguna Technopark-SEZ, Bian, Laguna, Philippines. It is further represented that in a Special Meeting held on July 1, 2011 the Board of Directors of SMP resolved to approve a declaration of dividends in the amount of USD11,033,572.00 or approximately USD2.75 per share payable at any time commencing September 2011 per Secretary's Certificate dated July 15, 2011; that as per Secretary's Certificate issued by the Corporate Secretary of SMP dated July 29, 2011, SMG holds 4,012,203 common shares constituting 99.99 percent of the outstanding capital stock of SMP; that the said shares were acquired by SMG on December 22, 1996, March 14, 2000, August 15, 2002, and December 21, 2004 based on the Secretary's Certificate issued by SMP dated July 29, 2011; and that the dividend declaration on July 1, 2011 is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Finance Manager of SMP dated July 29, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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 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, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It 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 invoke, may apply to the instant case. It provides: cDTIAC "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. 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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx" Based on the foregoing provisions, the Philippines may tax the dividends paid by a resident company to a company which is a resident of the Netherlands at a rate not exceeding 10 percent if the last-mentioned company, the capital of which is wholly or partly divided into shares, holds directly at least 10 percent of the capital of the company paying the dividends. Such being the case and considering that SMG is a company, the capital of which is wholly or partly divided into shares, and since it holds 99.99 percent of the capital of SMP, this Office is of the opinion and so holds that the dividend payments by SMP to SMG 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-Netherlands tax treaty. ( BIR Ruling No. ITAD 029-10 dated August 27, 2010 ). 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. EaHIDC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed March 9, 1989 and effective September 20, 1991.