ITAD BIR Ruling No. 039-12

February 8, 2012 ITAD BIR RULING NO. 039-12 Article 10 (Dividends) Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 89-11 Philex Mining Corporation 10th Floor MGO Building Legazpi corner Dela Rosa Street Legazpi Village, Makati City Attention: Mr. Manuel V. Pangilinan Gentlemen : This refers to your application for tax treaty relief dated August 23, 2011, on behalf of Asia Link BV ("Asia Link"), requesting confirmation that the dividends paid by Philex Mining Corporation ("Philex") to Asia Link are subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines 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 Asia Link is a corporation organized and existing under the laws of the Netherlands; that it is a resident of the Netherlands, with principal business address at Prins Bernhardplein 200 1097 JB Amsterdam, based on the Declaration of Residence issued by the Tax Administration of Rotterdam in the Netherlands on March 3, 2011; that Asia Link has an authorized capital stock of 200,000 Dutch Guilders divided into two hundred (200) shares with a par value of one thousand (1,000) Dutch Guilders each; that it is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on March 9, 2011; and that, on the other hand, Philex is a corporation organized and existing under the laws of the Philippines, situated at 27 Brixton corner Fairlane Streets, Pasig City. It is further represented, based on the Certificates issued by the Corporate Secretary of Philex on August 15, 2011 that the Board of Directors of Philex, at its meeting on July 27, 2011, declared cash dividends in the amount of PhP0.14 per share to the stockholders of record of Philex as of August 10, 2011; that the dividends will be paid on August 31, 2011; and that as of August 10, 2011, Asia Link holds 1,023,275,990 shares, representing 20.76% of the outstanding capital stock of Philex. caAICE It is finally represented that the dividends subject of this application for tax treaty relief 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 Sworn Statement issued by the same Corporate Secretary on August 15, 2011. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, the dividends paid to Asia Link are subject to income tax at the rate of 30 percent, thus: "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, under Section 32 (B) (5) of the Tax Code, such 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: "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" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: acIHDA "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. 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" Based on the above-cited paragraph 2, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company whose capital is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent in all other cases. This being the case, since Asia Link is a company whose capital is divided into shares and since it holds directly at least 10 percent of the capital of Philex, (in fact, it holds 20.76% of the outstanding capital stock of Philex), such dividends paid by Philex to Asia Link are subject to income tax at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. 89-11 dated March 14, 2011 ). 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