ITAD BIR Ruling No. 023-11

January 21, 2011 ITAD BIR RULING NO. 023-11 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. 010-84; BIR Ruling No. DA-ITAD-024-08; BIR Ruling No. DA-ITAD-058-08; BIR Ruling No. DA-ITAD-079-08; BIR Ruling No. ITAD-082-02 Atty. Rolando P. Nonato Room 406 Tulips Center A.S. Fortuna St., Bakilid Mandaue City, Cebu Attention: Atty. Rolando P. Nonato Authorized Representative of Dai-ichi Seiko Co., Ltd. Gentlemen : This refers to your letter dated May 28, 2009, on behalf of Singapore Dai-ichi Pte. Ltd. ("Dai-ichi-Singapore") , requesting for a ruling confirming that the cash dividends received by Dai-ichi-Singapore from Cebu Dai-ichi, Inc. ("Dai-ichi-Cebu") are subject to the 15% withholding tax pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty"). DEcTCa It is represented that Dai-ichi-Singapore is a corporation organized and existing under the laws of Singapore with principal address at 55 Yishun Industrial Park A, Singapore 768728 based on the Certificate of Residence issued by Mrs. Sabina H.B. Cheong, Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated April 15, 2009; 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 June 4, 2009; that, on the other hand, Dai-ichi-Cebu is an Export Processing Zone Authority (EPZA)-registered corporation with Certificate of Registration No. 92-033 issued on June 9, 1992 organized and existing under the laws of the Philippines with principal address at MEZ I, Lapulapu City, Cebu. It is further represented that Dai-ichi-Singapore owns 99.99% percent of the outstanding shares of the voting stock of Dai-ichi-Cebu as well as of the total shares issued by Dai-ichi-Cebu during the period of six (6) months immediately preceding the date of payment of the dividends declared on March 27, 2009, and that for the whole years of 2008 and 2009, Dai-ichi-Singapore owns 99.99% shares of Dai-ichi-Cebu; that on March 27, 2009, the Board of Directors of Dai-ichi-Cebu resolved that an amount of P50,000,000.00 be declared as cash dividends to be taken out of the unrestricted retained earnings or surplus profit of the corporation as of calendar year ended December 31, 2008 in favor of the stockholders of record as of the same date; and 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 proceedings, or judicial appeal per Sworn Statement issued by Dai-ichi-Cebu dated February 3, 2009. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, applies in general to dividends received by a nonresident foreign corporation which 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 . . ., 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." In this particular case, you invoked Article 10 of the Philippines-Singapore tax treaty, it provides: "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. DCcAIS 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 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 (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and (b) in all other cases, 25 per cent of the gross amount of the dividends. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident." Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Since Dai-ichi-Singapore holds 99.99% of the total outstanding shares of stock of Dai-ichi-Cebu during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, dividends received by Dai-ichi-Singapore shall be subject to the preferential tax rate of 15 percent, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. 010-84 dated January 19, 1984; BIR Ruling No. DA-ITAD-024-08 dated April 9, 2008; BIR Ruling No. DA-ITAD-058-08 dated August 11, 2008; BIR Ruling No. DA-ITAD-079-08 dated October 29, 2009; BIR Ruling No. ITAD-082-02 dated May 2, 2002) 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