ITAD BIR Ruling No. 036-14

April 14, 2014 ITAD BIR RULING NO. 036-14 Article 10, Philippines-Netherlands tax treaty KPMG Manabat Sanagustin & Co., CPA's 9th Floor, KPMG Center The Enterprise Center 6787 Ayala Avenue 14110 Makati City Attention: Maria Carmela M. Peralta Principal, Tax Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on May 29, 2013, on behalf of New Asia B.V. ("NABV") , requesting confirmation that dividend paid by Unilever Philippines, Inc., ("ULP") to NABV is subject to 10 percent preferential tax rate pursuant to Article 10 of 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 NABV, with principal address at Weena 455, 3013 Al Rotterdam, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on September 5, 2012; that it is a corporation organized and existing under the laws of the Netherlands with authorized capital of one hundred thousand euro (EUR100,000) divided into one hundred thousand (100,000) shares with a nominal value of one euro (EUR1) each; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 24, 2013; and that, on the other hand, ULP is a corporation organized and existing under the laws of the Philippines with principal address at 1351 United Nations Avenue, Manila, Metro Manila. It is further represented that during a meeting of the Board of Directors of ULP held on May 23, 2013, the Board declared cash dividend in the aggregate amount of Four Hundred Seventy One Million Four Hundred Sixty One Thousand Six Hundred Thirty Eight Pesos (P471,461,638.00) payable to all stockholders of record as of March 31, 2013, payable on May 31, 2013; that as of the date of record, NABV holds 4,918,523 common shares which represents 100% ownership in ULP; and that, based on a certification issued by the Hongkong and Shanghai Banking Corporation Limited HSBC Taguig City Branch on June 21, 2013, such dividend was remitted to Unilever Finance International BV on May 31, 2013. SICaDA It is finally represented, per Certification dated May 30, 2013 issued by ULP, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income 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 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 relation thereto, Article 10 of the Philippines-Netherlands 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 one of the States to a resident of the other State may be taxed in that other State. caDTSE 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. . . ." Based on the above-cited provision, the 10 percent preferential tax rate on dividend applies whenever the beneficial owner of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, 15 percent preferential tax rate applies. Such being the case and considering that the capital of NABV is wholly divided into shares, and that NABV holds more than 10 percent of the capital of ULP (in fact, 100%), this Office is of the opinion and so holds that the dividend paid by ULP to NABV shall be subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands 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