ITAD BIR Ruling No. 024-11

January 21, 2011 ITAD BIR RULING NO. 024-11 Article 15, Philippines-Italy Tax Treaty Aerotech Industries Philippines, Inc. Aerotech Supplies Philippines, Inc. Building 7242, Civil Aviation Complex Clark Freeport Zone, 2023 Pampanga Attention: Ms. Teresa C. Parian Chief Operating Officer Aerotech Industries Philippines, Inc. President Aerotech Supplies Philippines, Inc. Gentlemen : This refers to your letters both dated September 15, 2009 requesting for the application of a preferential tax treatment on directors' fees to be paid to Mr. Silvano Cervellin ("Mr. Cervellin") by Aerotech Industries Philippines, Inc. ("Aerotech Industries") and Aerotech Supplies Philippines, Inc. ("Aerotech Supplies") pursuant to Article 15 of the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and to Prevent Fiscal Evasion (hereinafter referred to as the "Philippines-Italy tax treaty" ). AECcTS It is represented that Mr. Cervellin is a resident of Italy based on the Residence Certificate issued on April 10, 2009 by the Civil Registrar of the Municipality of Besozzo of the Province of Varese in Italy; that Mr. Cervellin is a resident of that municipality since December 2, 2000, and his residence is at Via Sotto Campagna 19A, 21023 Besozzo, Varese, Italy; that Mr. Cervellin is not registered with the Department of Trade and Industry based on the Negative Certification issued by the latter on August 28, 2009; that Mr. Cervellin was in the Philippines for a period of ninety-two (92) days in 2009, based on the Certifications issued by Aerotech Industries and by Aerotech Supplies on August 28, 2009; and that on the other hand, Aerotech Industries and Aerotech Supplies are both domestic corporations with the same office address at Building 7242, Civil Aviation Complex, Clark Freeport Zone, 2023 Pampanga, Philippines. It is further represented that on May 19, 2009, at the annual meeting of the stockholders of Aerotech Supplies, Mr. Cervellin , together with four other individuals, were elected Director of the company, based on the Minutes of that meeting; that also, on May 20, 2009, at the annual meeting of the stockholders of Aerotech Industries, Mr. Cervellin , together with other four individuals, were elected Director of said company, based on the Minutes of that Meeting. It is finally represented that the issue/transaction subject of the application 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, based on the Sworn Statement issued by Aerotech Industries on August 7, 2009, and by Aerotech Supplies on September 16, 2009. In reply, please be informed that Article 15 of the Philippines-Italy tax treaty provides as follows: "Article 15 Directors' Fees Directors' fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State." Based on the aforementioned provision, directors' fees and similar payments received by a resident of Italy in his capacity as a member of the board of directors of a domestic company in the Philippines may be taxed in the Philippines. This being the case, inasmuch as Mr. Cervellin is a member of the Board of Directors of Aerotech Industries and of Aerotech Supplies , director's fees to be paid by these domestic corporations to Mr. Cervellin are subject to income tax in the Philippines. Particularly, Mr. Cervellin , being a non-resident alien individual not engaged in trade or business in the Philippines, is liable to pay income tax equal to 25% of directors' fees received pursuant to Section 25 (B) of the 1997 National Internal Revenue Code, as amended, thus: "SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24." HSIaAT This being the case, your request for preferential tax treatment on the directors fees to be paid to Mr. Cervillen is hereby denied for lack of legal basis. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue