ITAD BIR Ruling No. 041-13

February 28, 2013 ITAD BIR RULING NO. 041-13 Article 11, Philippines-USA Tax Treaty Caterpillar Financial Services Phils., Inc. 13 Economia St. Bagumbayan, Quezon City 110 Attention: Patricia Sunico Senior Territory Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 09 January 2012 , requesting confirmation that dividends paid by Caterpillar Financial Services Phils., Inc. ("CAT Phils.") to Caterpillar Financial Services Corporation ("CAT") , are subject to the preferential tax rate of twenty percent (20%) pursuant to Article 11 of The Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-USA tax treaty") . 1 It is represented that CAT is a corporation organized and existing under the laws of USA and is a resident thereof with principal address at 2120 West End Ave. Nashville, Tennessee USA 37201, as evidenced by the Certificate of Residence issued by the Field Director, Accounts Management, Department of the Treasury, Internal Revenue Service, USA; that CAT is not registered as a corporation or partnership in the Philippines, as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC), dated 27 October 2011; and that, on the other hand, CAT Phil. is a corporation organized and existing under the laws of the Philippines with principal address at 13 Economia St. Bagumbayan Quezon City 1110. It is further represented, as certified by the Corporate Secretary of AL Phil. , executed on 31 December 2011 that, during its Board of Directors special meeting held on 30 December 2011, they declared cash dividends in the aggregate amount of Ninety Nine Million Four Hundred Eighty-Five Thousand Two Hundred Eight Philippine Peso (Php99,485,208.00) payable to preferred stockholders of record on or before 30 December 2011; and that CAT holds Eight Hundred Thirty-Four Thousand Four Hundred Sixty-Two (834,462) preferred shares of CAT Phil. , with an aggregate amount of Eighty Three Million Four Hundred Fourty-Six Thousand Two Hundred Philippine Peso (Php83,446,200.00), that CAT owns 60% of the outstanding shares of the voting stocks of CAT Phil. It is further represented that CAT Phil. paid the subject dividends through Citibank New York ("Citibank NY") , by S.W.I.F.T. in favor of CAT in the amount of USD One Million Eight Hundred Nine Thousand Nine Hundred Eighty-Three & 96/100 (USD1,809,983.96), inclusive of charges, or Php Seventy-Seven Million Six Hundred Thirty-Nine Thousand Five Hundred Ninety-Nine & 22/100 (Php77,639,599.22) on 03 May 2012 as evidenced by a certification of bank remittance issued by Citibank dated 03 May 2012. prcd It is finally represented that the dividends subject of this TTRA 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 Certification issued by the Director of CAT Phil. executed on 16 December 2011. Ruling In reply, please be informed that Section 14 of Revenue Memorandum Order ("RMO") No. 72-2010, 2 provides: "SEC. 14. When and Where to File the TTRA. All tax treaty relief applications (updated BIR Form Nos. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Divisions (ITAD). If the forms of any necessary documents are submitted to any other BIR office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event . Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect disqualifying the TTRA under this RMO." As culled from the records, CAT Phil. declared the subject dividends on 30 December 2011, and they were paid on 03 May 2012, through telegraphic transfer in favor of CAT. The TTRA on the other hand, was filed on 09 January 2012. Clearly, the filing of the TTRA was made before the subject transaction. With regard to the tax rate, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to CAT are subject to income tax at the rate of 30%, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. TCASIH (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 percent (30%) 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". * 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: "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: 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." With respect to a treaty, you invoke the Philippines-USA tax treaty. Paragraphs 1 and 2 of Article 11 thereof provide: "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 DETACa 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." Under paragraph 2 (b) of Article 11, dividends arising in the Philippines and paid to a resident of USA may be taxed in the Philippines at a rate not to exceed 20 percent if the company recipient of the dividends holds directly at least 10 percent of the outstanding shares of the voting stock of the company paying the dividends 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). Accordingly, since CAT holds directly at least 10 percent of the voting shares or the total shares of CAT Phil. (in fact, 60% of the said shares), the dividends paid by CAT Phil. to CAT are subject to income tax at the rate of 20% of the gross amount thereof, pursuant to paragraph 2 (b), Article 11 of the Philippines-USA 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Its provisions on taxes apply on income derived or which accrued beginning January 1, 1983. 2. Published in the Manila Bulletin on October 20, 2010.