ITAD BIR Ruling No. 028-15

March 23, 2015 ITAD BIR RULING NO. 028-15 Article 10, Philippines-Singapore tax treaty Manabat Sanagustin & Co. Certified Public Accountant The KPMG Center 9/F 6787 Ayala Avenue Makati City 1226 Attention: Roberto L. Tan Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on December 16, 2013, on behalf of Mhe-Demag (S) Pte., Ltd. ("MDS") , requesting confirmation that the dividend paid by Mhe-Demag (P), Inc. ("MDP") to MDS is subject to 15 percent preferential tax rate pursuant to Article 10 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") . It is represented that MDS, with registered address at 33 Gul Circle, Singapore 629570, is a corporation organized and existing under the laws of Singapore, and is a resident thereof based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated December 27, 2012; 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 January 9, 2014; and that, on the other hand, MDP is a corporation organized and existing under the laws of the Philippines with principal address at Main Avenue, Severina Diamond Industrial Estate, West Service Road, KM. 16, South Expressway, Paraaque City. It is further represented that at the regular meeting of the Board of Directors of MDP held on November 21, 2013, a resolution was approved declaring cash dividend in the amount of Forty Million Pesos (P40,000,000.00) to all stockholders of record as of November 21, 2013 proportionate to their shareholdings; that of the P40,000,000.00 dividend, Php30,000,000.00 is payable to MDS on or before December 27, 2013; that as of the declaration and payment of the dividend, MDS holds 525,000 common shares which represents 75% of the outstanding capital stock of MDP; that the said shares were acquired by MDS thru various dates of acquisition beginning January 24, 1991 and until December 19, 2011; and that, such dividend was remitted by MDP to MDS on December 19, 2013. It is finally represented 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 the Sworn Statement issued by MDP dated December 3, 2013. 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 derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (B) Tax on Nonresident Foreign Corporation. cDaEAS (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. 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. . . ." 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. 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. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. 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. xxx xxx xxx 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" 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. acCDSH Considering that MDS, a resident of Singapore with no fixed place of business in the Philippines, holds 75 percent of the outstanding capital stock of MDP during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year or since December 19, 2011, the dividend paid by MDP to MDS is subject to the preferential tax rate of 15 percent, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. 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