ITAD BIR Ruling No. 034-15

March 23, 2015 ITAD BIR RULING NO. 034-15 Article 10, Philippines-Italy Tax Treaty O&G Leather Manufacturing Corporation Bldg. 4A 1-2 Philexcel Business Park Clark Freeport Zone Pampanga City Attention: Ms. Arlene D. Singca Representative Dear Madam : This refers to your tax treaty relief application filed on July 23, 2012 on behalf of MS. SIMONETTA BONINI ("Ms. Bonini") that the dividends paid by O&G LEATHER MANUFACTURING CORPORATION ("O&G") to Ms. Bonini are subject to preferential tax rate pursuant to 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 ("Philippines-Italy tax treaty"). It is represented that Ms. Bonini, with address at Via Matteo Tondi 8, 00158-Roma, Italia, is a resident of Italy within the meaning of the Philippines-Italy tax treaty, per Tax Residence Certificate issued by the Tax Agency, Provincial Office of Rome, Italy on April 1, 2012; that Ms. Bonini does not have any registered business in the Philippines per the Certification issued by the Philippine Department of Trade and Industry dated June 25, 2012; and that, on the other hand, O&G is a corporation organized and existing under the laws of the Philippines with principal address at Building 4A1-2 Philexcel Business Park, Clark Freeport Zone, Pampanga, Philippines. It is further represented, per Secretary's Certificate issued by O&G dated July 9, 2012, that on May 28, 2012, the Board of Directors of O&G declared cash dividends of Php22 Million for all stockholders of record as of December 31, 2011 from the unrestricted retained earnings of the corporation as of December 31, 2011; and that Ms. Bonini is the registered owner of 14,000 O&G shares with a par value of 100 per share with a total amount of Php1,400,000.00, representing approximately 3.5 percent of the total outstanding capital stock of O&G, acquired on January 13, 2006 and December 21, 2006. 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 proceeding, or judicial appeal per sworn statement issued by O&G dated July 9, 2012. In reply, please be informed that Section 25 (B) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income derived in the Philippines by a nonresident alien individual not engaged in trade or business within the Philippines. It provides: "SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade of 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 . . . dividends . . . , a tax equal to twenty-five percent (25%) of such income. . . 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." EAICTS Thus, Article 10 of the Philippines-Italy tax treaty, which you invoked, may apply to the instant case. 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 fifteen per cent of the gross amount of the dividend. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 4. 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. 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, a trade of 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 dividends are taxable in that other Contracting State according to its own law. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Italy who is the beneficial owner of the dividends the tax so charged shall not exceed 15 percent of the gross amount of the dividend. Such being the case, considering that the recipient of the subject dividends, Ms. Bonini, a resident of Italy, and is also the beneficial owner of the dividends, said dividends shall be subject to the preferential tax rate of 15 per cent of the gross amount of the dividends, pursuant to Article 10(2) of the Philippines-Italy tax treaty. This ruling is issued on the basis of the foregoing 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