ITAD BIR Ruling No. 021-16

March 15, 2016 ITAD BIR RULING NO. 021-16 Article 10, Philippines-Malaysia tax treaty Quiason Makalintal Barot Torres & Ibarra 21st Floor Robinsons-Equitable Bank Tower ADB Avenue cor., Pedro Poveda Road Ortigas Center, Pasig City Attention: Atty. Jose Luis Aliling Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on September 30, 2013, requesting confirmation that the dividends paid to TANDEM ASIA LIMITED ("TAL-MY") by DERMAWELL INTERNATIONAL, INC. ("DII-PH") are subject to preferential tax rate of 15 percent pursuant to Article 10 of the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Malaysia tax treaty"). It is represented that TAL-MY, a corporation organized and existing under the laws of Malaysia, is a company limited by shares, and is a resident of Malaysia for tax treaty purposes based on the Certificate of Residence issued by the Department of International Taxation of the Inland Revenue Board Malaysia dated June 19, 2013; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated October 20, 2015; and that, on the other hand, DII-PH is a corporation organized and existing under the laws of the Philippines. It is further represented, that on December 20, 2012, the Board of Directors of DII-PH declared cash dividends in the amount of Twenty Million Pesos (Php20,000,000.00) to be taken out of its unrestricted retained earnings in favor of all the stockholders of record as of close of business on December 31, 2012; that TAL-MY is the beneficial owner of 50,000 common shares of DII-PH, with par value of Php100.00 per share, for a total par value of Php50,000,000.00 constituting 40% of the total outstanding capital stock of DII-PH since 2011. It is finally represented, per the Sworn Statement dated September 20, 2013 issued by DII-PH, 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. 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 dividends derived in the Philippines by a nonresident foreign corporation which 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 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. CHTAIc 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 obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Malaysia tax treaty, which you invoke, may apply to the instant case. It states: "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. Dividends paid by a company which is a resident of the Philippines to a resident of Malaysia who is subject to tax in Malaysia in respect thereof, may be taxed in the Philippines in accordance with the laws of the Philippines but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed. a) 15 per cent of the gross amount of the dividends if the recipient is a company; b) in all other cases, 25 per cent of the gross amount of the dividends. 3. Dividends paid by a company which is a resident of Malaysia to a resident of the Philippines who is the beneficial owner thereof and is subject to Philippine tax in respect thereof shall be exempt from any tax in Malaysia which is chargeable on dividends in addition to the tax chargeable in respect of the income of the company: Provided that nothing in this paragraph shall affect the provisions of the Malaysian law under which the tax in respect of a dividend paid by a company which is a resident of Malaysia from which Malaysian tax has been, or has been deemed to be, deducted may be adjusted by reference to the rate of tax appropriate to the Malaysian year of assessment immediately following that in which the dividend was paid. xxx xxx xxx 6. The term 'dividends' as used in this Article means income from shares or other rights (not being debt-claims) participating in income or profits, as well as income from other corporate rights assimilated to income from shares according to the taxation laws of the Contracting State of which the company making the distribution is a resident." Based on the above-cited provision, dividends arising in the Philippines and paid to a resident of Malaysia may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed 15 percent of the gross amount of the dividends if the recipient of the dividends is a company. In all other cases, the 25 percent preferential tax rate applies. In view thereof and considering that TAL-MY, a resident corporation of Malaysia with no fixed place of business in the Philippines, holds 40 percent ownership of the capital of DII-PH since 2011, such dividends paid by DII-PH to TAL-MY are subject to the preferential tax rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Malaysia tax treaty. 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. EATCcI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue