ITAD BIR Ruling No. 033-10

August 27, 2010 ITAD BIR RULING NO. 033-10 Article 10, Philippines-Austria tax treaty; Section 34 (B) (5), NIRC of 1997 Tann Philippines, Inc. First Philippine Industrial Park Barangay Sta. Anastacia Sto. Tomas, Batangas Attention: Mr. Oliver Carsi-Cruz Managing Director Gentlemen : This refers to your letter dated March 17, 2009, requesting confirmation of the application of a preferential tax rate of ten percent (10%) on the dividend payments of TANN PHILIPPINES, INC. (hereinafter referred to as "Tann Phils." ) to TANN-PAPIER GMBH (hereinafter referred to as "Tann Papier" ) pursuant to the Convention between the Republic of the Philippines and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-Austria tax treaty" ). CSIcHA It is represented that Tann Papier is a nonresident foreign corporation duly organized and existing under the laws of Austria with office address at Johann-Roithnerstrabe 131, A-4050 Traun as evidenced by a Certificate of Residence issued by the Austrian Tax Administration dated December 4, 2008; that Tann Papier is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission dated December 18, 2008; and that Tann Phils. is a corporation duly organized and existing under the laws of the Philippines, with business address at the First Philippine Industrial Park, Barangay Sta. Anastacia, Sto. Tomas, Batangas under SEC Registration No. A200203395; that Tann Phils. is registered with the Philippine Economic Zone Authority (PEZA) under Certificate of Registration No. 02-016. It is further represented that during the Board of Directors meeting held on February 23, 2009 of Tann Phils. , a resolution was unanimously approved declaring cash dividends in the amount of EUR 1M (or the PESO equivalent at the time of exchange) out of Tann Phils'. unrestricted retained earnings as of December 31, 2008 to all stockholders in proportion to their respective stockholdings as of December 31, 2008, payable on or before April 30, 2009; that Tann Phils. has an authorized capital stock of Six Hundred Ninety-Nine Million Five Hundred Thousand Pesos (P699,500,000.00), divided into Sixty-Nine Thousand Nine Hundred Fifty (69,950) shares with a par value of Ten Thousand Pesos (P10,000) each; that of the said authorized capital stock, Five Hundred Fifteen Million Nine Hundred Thousand Pesos (P515,900,000.00) or Fifty-One Thousand Five Hundred Ninety (51,590) shares, have been subscribed, and Four Hundred Seventy Million Pesos (P470,000,000.00) worth, or Forty-Seven Thousand (47,000) shares have been paid up; that Tann Papier owns 99.99% of the subscribed capital of Tann Phils. having subscribed to Fifty-One Thousand Five Hundred Eighty-Five (51,585) shares, with Four Hundred Sixty-Nine Million Nine Hundred Fifty Thousand Pesos (P469,950,000.00) paid up as of October 1, 2008 as evidenced by a Secretary's Certificate issued by Tann Phils. dated April 21, 2009; and that the issue or transaction subject of the above 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 a judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended by Republic Act No. 9337, provides as follows: "SEC. 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 . . . dividends . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the same Code provides as follows: "SEC. 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 ( i.e. , TITLE II TAX ON INCOME): SaAcHE 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, the treaty involved is the Philippines-Austria tax treaty which, in its Article 10, provides as follows: "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 Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payments of the dividends; b) 25 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company with respect to the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. ADEacC xxx xxx xxx" Based on the aforequoted Article, the 10% preferential tax rate on dividends shall apply if the beneficial owner is a company which holds directly at least 10% either of the voting shares of the company or of the total shares issued by company paying the dividends during six (6) months immediately preceding the date of payment, and, twenty-five percent (25%) in all other cases. In view of the foregoing, the dividend payments by Tann Phils. to Tann Papier shall be subject to withholding tax at the rate of 10% of the gross amount of the dividends considering that Tann Papier owns 99.99% of the total outstanding stocks of Tann Phils. as of October 1, 2008, or during the period of six months immediately preceding the date of payments of the dividends on April 30, 2009. 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