ITAD BIR Ruling No. 042-14

April 14, 2014 ITAD BIR RULING NO. 042-14 Article 10, Philippines-Switzerland Tax Treaty Fernandez Aguja Law Firm Suite 5F, JL Building Don Jose Avila corner Don Gil Garcia Streets Cebu City Attention: Atty. Luna Mae F. Aguja Partner Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on August 13, 2013 on behalf of your client, Lexmark International Technology S.A., ("Lexmark SA") requesting confirmation that the dividends to be paid by Lexmark Research and Development Corporation ("Lexmark Corp") to Lexmark SA are subject to 10 percent tax rate pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). It is represented that Lexmark SA , with principal address at Batiment ICC-Block A, Route de Pr -Bois 20 Case Postale 508 CH, 1215 Gen va, Switzerland, is a resident of Switzerland within the meaning of the Philippines-Switzerland tax treaty per Certificate issued by the Administration Fiscale Cantonale of Switzerland on July 5, 2013; that Lexmark SA is not registered as corporation or as partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 17, 2013; and that, on the other hand, Lexmark Corp is a domestic corporation located at the 9th Lexmark Plaza I, Cebu Business Park, Cebu City. It is further represented, per Secretary's Certificate issued by Lexmark Corp dated August 8, 2013, that since April 4, 2012 until August 5, 2013, Lexmark SA is the owner of 968,796, excluding 5 nominee shares, common shares, with a par value of Php100.00 per share; that it represents 99.99% of the outstanding shares of stock of Lexmark Corp ; that these shares were acquired by Lexmark SA on various dates starting March 29, 2001 and April 4, 2002 through subscription; that at the Special Meeting of the Board of Directors of Lexmark Corp held on August 5, 2013 the Board approved the declaration of cash dividends in the amount of Two Hundred Sixty-three Million Pesos (Php263,000,000.00) to the stockholders on record as May 31, 2013; and that said dividend was remitted to Lexmark SA by Lexmark Corp on September 2, 2013 as evidenced by Certification from Citibank N.A. dated December 5, 2013. cTSDAH It is finally represented, based on the Sworn Certification executed by the President of Lexmark Corp on August 8, 2013, that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines 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 any income may be exempt from income tax to the extent required by any treaty obligation binding upon the Philippine Government, 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 for the dividends of Lexmark SA , may apply. It provides: aCcEHS "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. xxx xxx xxx" Based on the aforequoted provisions of Article 10 of the Philippines-Switzerland tax treaty, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation; and 15 percent if the shareholding of the recipient company is below 10 percent of the capital of the paying company. In view thereof, since Lexmark SA directly owns 99.99 percent of the outstanding shares of stock of Lexmark Corp , this Office is of the opinion and so holds that the dividend to paid by Lexmark Corp to Lexmark SA is subject to the 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland 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. CcaDHT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue