ITAD BIR Ruling No. 034-10

September 14, 2010 ITAD BIR RULING NO. 034-10 Article 10 (2) (a), Philippines-France tax treaty; BIR Ruling No. ITAD-017-01; BIR Ruling No. ITAD-004-02; BIR Ruling No. ITAD-064-03; BIR Ruling No. ITAD-196-03; BIR Ruling No. ITAD-101-04 Tam-Yap Caga & Associates Attorneys-at-Law Unit B, 15th Floor, ACT Tower H.V. Dela Costa Street Salcedo Village, Makati City Attention: Ms. Teresa R. Tam-Yap Ms. Maria Graciela B. Suratos Gentlemen/Ladies : This refers to your letter dated February 18, 2009, on behalf of Egis Road Operations S.A. (formerly known as Transroute International S.A. ) (hereinafter referred to as "Egis" ), requesting confirmation of the applicable tax on the dividend payments of Tollways Management Corporation (hereinafter referred to as "TMC") to Egis based on the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-France tax treaty" ). SETaHC It is represented that Egis is a nonresident foreign corporation duly organized and existing under the laws of France with office address at 11 Avenue Du Centre, 78280 Guyancourt, France, per the duly consularized authenticated copy of Registration in the Corporate Registry issued by the Office of the Registrar of the Versailles Commercial Court dated September 6, 2007, and is a resident of France per the Certification of the French Tax Authority for the Fiscal Year 2009 dated February 3, 2009; that it 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 January 9, 2009; that, on the other hand, TMC is a corporation duly organized and existing under the laws of the Philippines, with principal office at OMC Building, Balintawak Toll Plaza, Km. 12, North Luzon Expressway, Caloocan City. It is further represented that during the meeting of TMC's Board of Directors on December 17, 2008, a resolution was passed and approved declaring cash dividends in the aggregate amount of One Hundred Twenty Million Pesos (P120,000,000.00) or P0.3158 per share, payable to TMC's stockholders of record as of December 17, 2008 based on their shareholdings as of said date, which cash dividends shall be paid on or prior to December 23, 2008; that as of December 17, 2008, the number of shares of TMC registered in the name of Egis is 129,196 amounting to Twelve Million Nine Hundred Nineteen Thousand Six Hundred Pesos (P12,919,600.00) which represents 34% of the total number of shares of TMC; and that the issue/s or transactions subject of the above request for ruling are 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 provides, viz. : "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, viz. : "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): 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 tax treaty invoked is the Philippines-France tax treaty. Its Article 10 provides as follows: DHTCaI "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 beneficial owner is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b. in all other cases 25 per cent of the gross amount of the dividends. xxx xxx xxx" Based on the foregoing, the 15 percent preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividends owns at least 10 percent of the voting shares of the paying company. However, there is a Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic (hereinafter referred to as "Protocol") which took effect on January 1, 2000, which in its Article 5 reads as follows: "In Article 10 of the Convention: in paragraph 2, the rates of '15 percent' and '25 percent' are replaced respectively by '10 percent' and '15 percent'; xxx xxx xxx" Thus, Article 10 (2) of the Philippines-France tax treaty was amended to the effect that the tax rates 15 and 25 percent were respectively replaced by 10 and 15 percent. In view thereof, considering that Egis , being the beneficial owner/recipient of the subject dividends, owns 34% of the total outstanding stocks of TMC as of record date which is more than the required shareholding of 10 percent, and since the subject transaction transpired after the abovementioned Protocol took effect, the dividends payable to Egis by TMC shall be subject to a preferential tax rate of 10 percent of the gross amount of the dividends, pursuant to the Philippines-France tax treaty, as amended. (BIR Ruling No. ITAD-017-01 dated February 19, 2001; BIR Ruling No. DA-ITAD-004-02 dated January 11, 2002; BIR Ruling No. DA-ITAD-064-03 dated April 25, 2003; BIR Ruling No. DA-ITAD-196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-101-04 dated September 13, 2004) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. aSHAIC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue