ITAD BIR Ruling No. 039-10

September 21, 2010 ITAD BIR RULING NO. 039-10 Article 11, Philippines-United States of America tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 141-95; BIR Ruling No. DA-ITAD-014-09; BIR Ruling No. DA-ITAD-032-09; BIR Ruling No. ITAD-215-02; BIR Ruling No. ITAD-136-05 Alaska Milk Corporation 6th Floor, Corinthian Plaza Building, 121 Paseo de Roxas, Makati City Attention: Arnold Abad Authorized Representative Gentlemen : This refers to your letter dated February 22, 2010, requesting confirmation that the dividends paid by ALASKA MILK CORPORATION ("Alaska") to JADESTONE INVESTMENTS LLC ("Jadestone") are subject to the preferential tax rate of 20 percent, pursuant to the provisions of Article 11 (2) (b) of the Philippines-United States of America Tax Treaty ("RP-US Tax Treaty") . It is represented that Jadestone is a limited liability company organized and existing under the laws of the United States, with registered office at Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, in the County of New Castle per Certificate of Incorporation dated February 22, 2005 as certified by Mr. Jeffrey W. Bullock, Secretary of the State of Delaware; that Jadestone is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission dated March 9, 2010; that on the other hand, Alaska is a domestic corporation, organized and existing under the laws of the Philippines, with office address at 119 6th Floor, Corinthian Plaza Building, 121 Paseo de Roxas, Makati City. It is also represented that Jadestone holds Four Hundred Seventy-Four Million Two Hundred Seventy Thousand Six Hundred Ninety-Nine (474,270,699) common shares with a par value of One Peso (P1.00) per share, representing 53.586% of the total issued and outstanding capital stock of Alaska as of taxable year 2009 and 52.764% as of taxable year 2008, per certification issued by the Corporate Secretary of Alaska dated July 13, 2010; that at the meeting of the Board of Directors of Alaska held on May 12, 2009, it was resolved that a cash dividend in the amount of Twenty Centavos (P0.20) per share, composed of a regular cash dividend of Five Centavos (P0.05) per share payable on June 30, 2009 to all stockholders of record as of June 5, 2009, and a special dividend of fifteen centavos (P0.15) per share payable as follows: a.) P0.05 per share on September 30, 2009 to all stockholders of record as of September 7, 2009; SaHIEA b.) P0.05 per share on December 29, 2009 to all stockholders of record as of December 3, 2009; and, c.) P0.05 per share on March 30, 2010 to all stockholders of record as of March 5, 2010; and that the transaction subject of the above request for ruling is not under investigation, or subject of an on-going audit, administrative protest, claim 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. 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 accordance with the foregoing, Article 11 of the RP-US tax treaty provides as follows: "Article 11 DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed: a. 25 percent of the gross amount of the dividend; or b. When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. HCaDIS xxx xxx xxx 5. The term 'dividends' as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident. xxx xxx xxx" In view of the foregoing, since Jadestone owns more than 10 percent of the outstanding shares of the voting stock of Alaska, the paying corporation, during the part of the latter's taxable year which precedes the date of payment and during the whole of its prior taxable year, this Office is of the opinion and so holds that the cash dividends to be remitted by Alaska to Jadestone are subject to the preferential rate of 20 percent withholding tax pursuant to Article 11 (2) (b) of the RP-US tax treaty. (BIR Ruling No. 141-95 dated September 12, 1995; BIR Ruling No. DA-ITAD-014-09 dated February 6, 2009; BIR Ruling No. DA-ITAD-032-09 dated March 6, 2009; BIR Ruling No. ITAD-215-02 dated December 11, 2002; BIR Ruling No. ITAD-136-05 dated November 15, 2005) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue