ITAD BIR Ruling No. 021-10

August 20, 2010 ITAD BIR RULING NO. 021-10 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 Angara Abello Concepcion Regala & Cruz Law Offices ACCRA Building 122 Gamboa St., Legaspi Village 0770 Makati City Attention: Ruby Rose J. Yusi Eric R. Recalde Leo L. San Juan Gentlemen : This refers to your letter dated 22 April 2008, on behalf of your client, Cascal NV (Cascal), requesting confirmation of your opinion that the dividends to be paid by Subic Water & Sewerage Co., Inc. (SWSCI) is subject to the preferential rate of 10% pursuant to Article 10 of the Philippines-Netherlands tax treaty. It is represented that Cascal is a corporation organized and existing under the laws of The Netherlands with principal address at Strawinskylaan 3105, Suite 6.1.24, 1077 ZX Amsterdam, The Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 25, 2008; that SWSCI is a corporation organized and existing under the laws of the Philippines with principal address at Subic Water Building, Rizal Avenue (SubCom Area) Subic Bay, Freeport, Olongapo City; that Cascal owns Two Million Seven Hundred Forty Six Thousand Seven Hundred Forty (2,746,740) shares representing 30% of the total outstanding and voting shares of SWSCI; that on January 8, 2008, SWSCI declared cash dividends of P13.11 per share to all stockholders of record as of December 31, 2007 on the basis of outstanding capital stock held them in the aggregate amount of One Hundred Twenty Million Thirty Two Thousand Five Hundred Thirty Eight Pesos (Php120,032,538.00), payable on or before end of March 2008; that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per Sworn Statement issued by SWSCI dated March 6, 2008. 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 received by a nonresident foreign corporation which provides: "Section 28. Rates of Income Tax on Foreign Corporations. (B) Tax on Nonresident Foreign Corporation. aTcSID (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, . . .: 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. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (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, the provisions of Article 10 of the Philippines-Netherlands tax treaty, which you invoke, 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. 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." Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10% preferential tax rate on dividends applies when the following conditions concur: (1) the payor and recipient of the dividends must be separately treated as a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, (4) the recipient of the dividends is the beneficial owner thereof, (5) the capital of such recipient is wholly or partly divided into shares, and (6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. aSTAIH On the other hand, in applying the 15 percent preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of The Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes". For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: "Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10% preferential tax rate are present. Firstly, SWSCI, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Cascal, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, SWSCI is deemed a domestic corporation, while Cascal is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, SWSCI is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, Cascal, the recipient of the subject dividends, is a resident of The Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of The Netherlands. Fourthly, Cascal is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated March 17, 2008. IHaSED Fifthly, the capital of Cascal is wholly divided into shares, based on the Articles of Incorporation of Cascal. Lastly, Cascal directly holds 30% of the total amount subscribed and paid up shares of SWSCI, per Secretary's Certificate dated March 17, 2008 issued by the Corporate Secretary of SWSCI, or more than the required stockholdings of 10%. Based on the above-cited provisions, the 10% preferential tax rate on dividends applies whenever the beneficial owner of the dividends owns at least 10% of the capital of the paying company. In all other cases, the fifteen percent (15%) preferential tax rate applies. Such being the case and considering that Cascal holds more than 10% of the capital of SWSCI, this Office is of the opinion and so holds that the dividend payments by SWSCI to Cascal shall be subject to the preferential tax rate of 10% of the gross amount of the dividends pursuant to Article 10 of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD-008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009; BIR Ruling No. DA-ITAD-085-09 dated September 10, 2009) 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