ITAD BIR Ruling No. 030-10

August 27, 2010 ITAD BIR RULING NO. 030-10 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. 010-84; BIR Ruling No. DA-ITAD-037-99; BIR Ruling No. DA-ITAD-031-00; BIR Ruling No. DA-ITAD-119-00; BIR Ruling No. ITAD-082-02 Du-Baladad and Associates 20th Floor, Chatham House Herrera cor. Valero Streets 1227 Makati City Attention: Benedicta Du-Baladad Managing Partner Gentlemen : This refers to your letter dated January 14, 2010 on behalf of your client, ATR KimEng Financial Corporation (ATR KimEng) , requesting confirmation of your opinion that the dividends paid and/or to be paid to Kim Eng Holdings Limited (Kim Eng Holdings) are subject to the preferential tax rate of 15 percent pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. It is represented that Kim Eng Holdings is a corporation organized and existing under the laws of Singapore with registered office at 9 Temasek Boulevard, #39-00 Suntec Tower Two, Singapore 038989; 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 January 5, 2010; that on the other hand, ATR KimEng is a corporation organized and existing under the laws of the Philippines with principal address at 17th Floor, Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. It is further represented that based on the Secretary's Certificate issued by ATR KimEng dated June 21, 2010, from January 1, 2008 up to December 10, 2008, inclusive, Kim Eng Holdings owned Two Hundred Sixty Seven Million Eighty Nine Thousand Nine Hundred Forty Nine (267,089,949) common shares in ATR KimEng with par value of Two Hundred Sixty Seven Million Eighty Nine Thousand Nine Hundred Forty Nine Pesos (Php267,089,949), which constituted 38.57% of the outstanding voting capital stock of ATR KimEng throughout the same period; that on December 11, 2008, the total shareholding of Kim Eng Holdings increased to Four Hundred Nineteen Million Four Hundred Twenty-Four Thousand Three Hundred Forty-Eight (419,424,348) common shares in ATR KimEng with par value of One Peso (Php1.00) per share, or an aggregate par value of Four Hundred Nineteen Million Four Hundred Twenty-Four Thousand Three Hundred Forty-Eight Pesos (Php419,424,348.00) which constituted 42.40% of the outstanding voting capital stock of ATR KimEng as of the same date, and there has been no change in the shareholding and percentage of shareholding of Kim Eng Holdings in ATR KimEng from December 11, 2008 up to the date hereof; that on November 26, 2009, the Board of Directors of ATR KimEng approved a resolution to declare cash dividends in the amount of Eight Centavos (Php0.08) per share, to be taken out of the unrestricted retained earnings of ATR KimEng as of December 31, 2008 payable on January 25, 2010 per Secretary's Certificate issued by ATR Kim Eng dated December 15, 2009; 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 ATR KimEng dated December 15, 2009. ACTaDH 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 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. xxx xxx xxx 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." 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 Kim Eng Holdings holds 42.40% of the total outstanding capital shares of ATR KimEng 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 Kim Eng Holdings shall be subject to the preferential tax rate of 15 percent, pursuant to the 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