ITAD BIR Ruling No. 037-14

April 14, 2014 ITAD BIR RULING NO. 037-14 Article 9, Philippines-United Kingdom Tax Treaty Baniqued & Baniqued Attorneys at Law 8th Floor Jollibee Centre San Miguel Avenue Pasig City Metro Manila Attention: Atty. Bernadette V. Quiroz Legal Counsel Gentlemen : This refers to your tax treaty relief application filed on August 16, 2012, on behalf of your client, Glaxo Group Limited ("GGL") , for a confirmation that the dividend to be paid by GlaxoSmithKline Philippines, Inc. ("GPI") to GGL is subject to the preferential tax rate of 15 percent pursuant to Article 9 of the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty"). It is represented that GGL, with principal address at 980 Great West Road, Brentford, Middlesex, TW8 9GS, is a resident of the United Kingdom within the meaning of Article 4 of the Philippines-UK tax treaty per Certificate of Residence issued by the HM Revenue & Customs, Large Business Service dated May 18, 2012; that GGL is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 26, 2012; and that, on the other hand, GPI is a domestic corporation duly organized and existing under Philippine laws, located at the 2266 Don Chino Roces Avenue, Makati City. It is further represented, as shown in the Secretary's Certificate issued by GPI on August 1, 2012, that during their July 30, 2012 Special Meeting, the Board of Directors of GPI approved the declaration of cash dividend in the amount of Php2,015,875,975.00 from GPI's unrestricted retained earnings as of December 31, 2011, in favor of the current stockholders of record; that as of December 31, 2011 and as of July 30, 2012, GGL owns 100,700,649 shares out of the 133,016,710 total outstanding common shares of GPI with a par value of Php10.00 per share representing 75.71% of the voting capital stock of GPI; that the shares owned by GGL were acquired either through original subscriptions or by the declaration of stock dividends by GPI on various dates starting August 19, 1968 up to September 10, 2001; and that the dividend in the amount of US$31,093,139.00 was paid by GPI to GGL on August 30, 2012 through HSBC Bank USA per sworn Certification issued GPI on June 18, 2013. HICcSA Finally, it is represented that the transaction subject of the herein 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 taxpayers involved per the sworn Certification issued by GPI dated August 14, 2012. 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 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: "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" In this particular case, Article 9 of the Philippines-UK tax treaty which you invoked may apply to the instant case. It provides: "Article 9 Dividends 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: EHcaAI (a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; (b) in all other cases 25% of the gross amount of the dividends. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company. 5. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on a trade or business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Article 7 or 13, as the case may be, shall apply. xxx xxx xxx" Based on the above provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of United Kingdom at a rate not exceeding 15 percent of the gross amount of the dividends if the latter holds directly or indirectly at least 10 percent of the voting capital stock of the first-mentioned company. In all other cases, the 25 percent preferential tax rate shall apply. In view of the foregoing, since GGL owns 75.71 percent of the outstanding voting capital stock of GPI, the paying corporation, this Office is of the opinion and so holds that the cash dividends to be paid by GPI to GGL are subject to the preferential rate of 15 percent withholding tax pursuant to Article 9 (1) (a) of the Philippines-United Kingdom 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. HIACEa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue