ITAD BIR Ruling No. 038-12

February 8, 2012 ITAD BIR RULING NO. 038-12 Articles 10 (Dividends) Philippines-Germany tax treaty; BIR Ruling No. ITAD 63-10 Philippine Long Distance Telephone Company Ramon Cojuangco Building Makati Avenue Makati City Attention: Charito R. Villena Tax Management Executive Gentlemen : This refers to your application for tax treaty relief dated September 13, 2011 requesting confirmation that dividends paid by the Philippine Long Distance Telephone Company ("PLDT") to Sal. Oppenheim Jr. and Cie. AG and Co. KGaA ("Sal. Oppenheim") are subject to income tax at the rate of 15 percent pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that Sal. Oppenheim is a corporation organized and existing under the laws of Germany and is a resident thereof based on the Certification issued by the Commercial Register in Cologne, Germany, on April 7, 2011, and on the Certificate of Residence issued by the German Tax Authorities on January 3, 2011; that Sal. Oppenheim is situated at Unter Sachsenhausen 4, Cologne, Germany; that Sal. Oppenheim is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on December 2, 2011; and that on the other hand, PLDT is a domestic corporation situated at the Ramon Cojuangco Building Makati Avenue, Makati City, Philippines. It is further represented, based on the Certificate issued by the Corporate Secretary of PLDT on September 8, 2011, that PLDT (through its Board of Directors who held a meeting on August 2, 2011) declared regular cash dividends amounting to P78.00 per common share of stock in favor of its common stockholders of record as of August 31, 2011; that the dividends will be taken out of the unaudited and unrestricted retained earnings of PLDT as of June 30, 2011, and payable on September 27, 2011; that based on the Certification issued by the Securities Services of the Hong Kong and Shanghai Banking Corporation (of 7th Floor, HSBC Centre, 3058 Fifth Avenue, West Bonifacio Global City, Taguig City, Philippines) on September 5, 2011, Sal. Oppenheim holds 28,295 of the total common shares of PLDT, amounting to P67,625,050.00, and equivalent to 0.0152 percent ownership therein. DCESaI It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the respective Sworn Statements issued by the Assistant Vice President of PLDT on September 8, 2011. In reply, please be informed that under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, dividends paid to Sal. Oppenheim are subject to income tax at the rate of 30 percent, thus: "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 interests, 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) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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: SAHIaD 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." For this purpose, you invoke the Philippines-Germany tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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 the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends." Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company which owns directly at least 25 percent of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, considering that Sal. Oppenheim does not hold directly at least 25 percent of the capital of PLDT (in fact, only 0.0152 percent), such dividends paid by PLDT to Sal. Oppenheim are subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 10 of the Philippines-Germany tax treaty. (BIR Ruling No. ITAD 63-10 dated November 19, 2010) 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. SaIEcA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue