ITAD BIR Ruling No. 035-14

April 14, 2014 ITAD BIR RULING NO. 035-14 Article 10, Philippines-Netherlands Tax Treaty SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Mr. W.U. Villanueva Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed December 18, 2012, on behalf of MJN Holdings (Asia) B.V. ("MJN") , requesting confirmation that the dividend payments made by Mead Johnson Nutrition (Philippines), Inc. ("Mead Johnson") to MJN are subject to 10 percent preferential tax rate pursuant to the Convention between the Republic of the Philippines and the Kingdom of The Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that MJN, with address at Zuiderplein 142 Tower H, 17th Floor, 1077 XV, Amsterdam, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands dated July 5, 2012; that based on its Deed of Amendments of the Articles of Association, MJN is a company incorporated under the laws of the Netherlands with authorized capital of ninety thousand euro (90,000.00) divided into ninety thousand (90,000) shares with a par value of one euro (1.00) each; that MJN is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company, issued by the Securities and Exchange Commission on December 12, 2012; that, on the other hand, Mead Johnson is a domestic corporation duly organized and existing under Philippine laws located at 2309 Chino Roces Avenue Extension, Makati City. It is further represented, as shown in the Secretary's Certificate issued by Mead Johnson dated December 4, 2012, that the Board of Directors of Mead Johnson has unanimously approved the declaration of cash dividends of Php741,633,328, equivalent to Php530.69 per share to all stockholders of record as of December 3, 2012, payable not earlier than December 20, 2012; that per Secretary's Certificate dated January 3, 2013 MJN is a stockholder of record of Mead Johnson with 1,397,495 common shares registered in the name with a total par value of Php139,749,500.00 equivalent to 99.99999% of the total issued and outstanding shares of stock of Mead Johnson , and acquired by MJN by transfer of shares from Bristol-Myers Squibb Luxembourg International S.C.A. on December 31, 2004 and Bristol-Myers Squibb Company on August 30, 2005. THEDcS It is finally represented, based on the Sworn Statement by the same Corporate Secretary on December 5, 2012, that the transaction subject of the 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 of the taxpayers involved; and that per the January 13, 2013 Certification issued by Citibank N.A., Manila, outward remittances in favor of MJN were made by Mead Johnson via Citibank's branches in New York to London on December 20, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, 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. 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt or partially exempt to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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. xxx xxx xxx" With respect to a treaty, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Its Article 10 provides: HSEIAT "Article 10 Dividends 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that 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 recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as MJN is a private company in the Netherlands the capital of which is wholly divided into shares, and since MJN holds directly 99.99999% of the capital of Mead Johnson (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by Mead Johnson to MJN are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to the Philippines-Netherlands 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. IcSADC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue