ITAD BIR Ruling No. 042-12

February 9, 2012 ITAD BIR RULING NO. 042-12 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-27-10; BIR Ruling No. ITAD-21-10 Panasonic System Networks Phils. Corp. Bldg. 2, 102 Laguna Blvd.,Bo. Don Jose Laguna Technopark, Inc.,Sta. Rosa City, Laguna Attention: Hiroyuki Nishida Finance Director Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on June 14, 2011, on behalf of PANASONIC HOLDING (NETHERLANDS) BV ("Panasonic Holding"), requesting confirmation that the dividend payments made by PANASONIC SYSTEM NETWORKS PHILIPPINES CORPORATION ("PSNP") to Panasonic Holding are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of 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 Panasonic Holding, with office address at Zuidplein 136-Tower H 1077 XV Amsterdam, is a resident of The Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, as evidenced by the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands dated April 28, 2011; that Panasonic Holding is a corporation duly organized and existing under the laws of The Netherlands, engaged in the financing and management of companies and other enterprises, with an authorized capital of One Million One Hundred Thirty-Four Thousand Five Hundred Euros (EUR1,134,500) and is divided into eleven thousand three hundred forty-five (11,345) ordinary shares with a par value of One Hundred Euros (EUR100) each, as shown in its Articles of Incorporation; that it is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 24, 2011; and that, on the other hand, PSNP is a corporation duly organized and existing under the laws of the Philippines, with office address at Bldg. 2, 102 Laguna Blvd.,Bo. Don Jose, Laguna Technopark, Inc.,Sta. Rosa City, Laguna. SEACTH It is further represented that Panasonic Holding owns 5,000,000 common shares of PSNP at one peso (P1.00) par value, representing 100 percent of the outstanding capital stock of PSNP per Secretary's Certificate dated June 10, 2011; that on June 10, 2011, a resolution was adopted and approved by the Board of Directors of PSNP declaring cash dividend of Twenty-Four Million Eight Hundred Forty-One Thousand Three Hundred Ninety and 81/100 US Dollars (USD24,841,390.81) in favor of all stockholders of record as of March 31, 2011, payable on June 24, 2011; and that per Sworn Certification dated June 10, 2011, the issue or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "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. IDSaEA xxx xxx xxx" In this case, the tax treaty invoked is the Philippines-Netherlands tax treaty, Article 10 of which provides as follows: "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 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of one of the States, carries on business in the other State, of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State professional services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. SCHcaT xxx xxx xxx" Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which 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 of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Panasonic Holding is a private company in the Netherlands, the capital of which is wholly divided into shares and since Panasonic Holding holds 100 percent of the capital of PSNP (which is actually more than the required minimum of shareholding of 10 percent),such dividends to be paid by PSNP to Panasonic Holding are subject to income tax in the Philippines 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. ITAD-27-10 dated August 27, 2010; BIR Ruling No. ITAD 21-10 dated August 20, 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 having a different tax treatment, 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