ITAD BIR Ruling No. 039-11

February 8, 2011 ITAD BIR RULING NO. 039-11 Article 10 (2) (a), Philippines-Switzerland Tax Treaty; BIR Ruling No. ITAD 53-10; BIR Ruling No. ITAD 9-10 Philip Morris Philippines Manufacturing, Inc. 27th Floor, Tower 1, The Enterprise Center Ayala Avenue, Makati City Attention: Mitchell Gault Authorized Representative Gentlemen : This refers to your letter dated November 8, 2010, requesting confirmation that the dividend payments made by Philip Morris Philippines Manufacturing, Inc. ("PMPMI") to Philip Morris Brands SARL ("PMB") [formerly FTR Holdings SA ("FTRH")], 1 are subject to the preferential tax rate of 10% pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that PMB is a nonresident foreign corporation duly organized and existing under the laws of Switzerland and is a resident of Switzerland based on the extract issued by the Commercial Register of Neuchatel in Switzerland on September 2, 2010, and on the Statement of Tax Status of the Business issued by the Department de la Justice, de la Secrito et des Finances in Neuchatel in Switzerland on September 30, 2010; that PMB has its principal office at Quai Jeanrenaud 3, CH-2000 Neuchatel, Switzerland; that PMB is not registered as a corporation or as a partnership in the Philippines, per Certification of Non-Registration issued by the Securities and Exchange Commission on October 21, 2010; and that, on the other hand, PMPMI is a corporation organized and existing under the laws of the Philippines with principal office at the 27th Floor, Tower 1, The Enterprise Center 6766, Ayala Avenue, Makati City, Philippines. It is further represented that on November 8, 2010, the Board of Directors of PMPMI, at its meeting, adopted and approved a resolution authorizing PMPMI to declare cash dividends amounting to Four Billion Pesos (PhP4,000,000,000.00), or equivalent to 266.7 percent of the aggregate par value of the preferred shares of PMPMI, in favor of its preferred stockholders as of November 8, 2010; that the dividends will be taken from PMPMI's unrestricted retained earnings as of December 31, 2009, and payable on or before November 30, 2010; and that as of November 8, 2010, being the date of declaration of the dividends, PMB holds 529,995 shares in PMPMI (250,000 preferred shares and 279,995 common shares), each share with a par value of PhP1,000.00, or a total par value of PhP529,995,000.00 (PhP250,000,000.00 for preferred shares and PhP279,995,000.00 common shares), out of the total 530,000 shares of PMPMI, representing 99.99 percent ownership in PMPMI. ACTIHa It is finally represented that the transaction subject of the 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, per Sworn Statement issued by the Tax Manager of PMPMI on November 9, 2010. 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 received 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 such dividends derived by a nonresident foreign corporation may be exempt from income tax (or partially exempt if subject to a reduced rate only) to the extent required by any treaty obligation on the Philippines, 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" Thus, the provisions of Article 10 of the Philippines-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides "Article 10 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 also be taxed in the Contracting 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 3. 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 other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. SacTCA xxx xxx xxx" Based on the aforequoted provisions, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed in the Philippines but at a rate not exceeding 10% of the gross amount of the dividends if the recipient is a company which holds directly at least 10% of the capital of the Philippine corporation, and at a rate not exceeding 15% of the gross amount of the dividends in all other cases. In view thereof, since PMB holds directly at least 10% of the capital stock of PMPMI, this Office is of the opinion and so holds that the dividend payments by PMPMI to PMB with respect to the preferred shares which the latter holds in PMPMI are subject to the preferential tax rate of 10% of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR RULING NO. ITAD 53-10 dated October 18, 2010 and BIR RULING NO. ITAD 9-10 dated June 3, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Under a Merger Contract between PMB and FTRH dated August 23, 2010 where PMB being "the acquiring company" and FTRH being "the company being acquired".