ITAD BIR Ruling No. 043-10

September 27, 2010 ITAD BIR RULING NO. 043-10 Article 10 (2) (a), Philippines-Singapore tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 010-84; BIR Ruling No. ITAD-082-02; BIR Ruling Nos. DA-ITAD-024-08; 058-08; 079-08 Rohm Electronics Philippines, Inc. People's Technology Complex Special Economic Zone Carmona, Cavite 4116 Philippines Attention: Kunihiko Tsuru President Gentlemen : This refers to your letter dated July 2, 2007 requesting confirmation that the dividend remittances of Rohm Electronics Philippines, Inc. (Rohm Philippines) to Rohm Electronics Asia Pte., Ltd. (Rohm Singapore) are subject to a fifteen percent (15%) preferential tax rate pursuant to Article 10 of the Philippines-Singapore tax treaty. It is represented that Rohm Singapore with business address at 9 Temasek Boulevard, #20-02 Suntec City, Tower 2, Singapore 038989, is a resident of Singapore within the meaning of Article 4 of the Philippines-Singapore tax treaty, per Certification dated May 26, 2007 issued by the Inland Revenue Authority of Singapore; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 12, 2007; that Rohm Philippines is a domestic corporation with office address at People's Technology Complex, Special Economic Zone, Carmona, Cavite 4116, Philippines. It is further represented that as of March 31, 2007 Rohm Singapore is the registered owner of Two Million Four Hundred Fifty-Eight Thousand Five Hundred Twenty-Four (2,458,524) common shares with par value of One Hundred Pesos (PhP100.00), amounting to Two Hundred Forty-Five Million Eight Hundred Fifty-Two Thousand Four Hundred Pesos (PhP245,852,400.00), representing 20.78% of the voting shares in Rohm Philippines; that it also owns Three Hundred Eighty-Six Thousand Two Hundred Four (386,204) preferred shares with a par value of One Hundred Pesos (PhP100.00), amounting to Thirty-Eight Million Six Hundred Twenty Thousand Four Hundred Pesos (PhP38,620,400.00), in Rohm Philippines, as shown in the certification issued by the Corporate Secretary of Rohm Philippines dated February 8, 2008; that from July 14, 1995 to March 31, 2007 Rohm Singapore held the above-mentioned common and preferred capital stock of Rohm Philippines; that on June 14, 2007 the Board of Directors of Rohm Philippines declared cash dividends in the amount of Forty-Five Million One Hundred Fifty Thousand US Dollars (US$45,150,000.00) to be taken out from the unrestricted retained earnings of Rohm Philippines as of March 31, 2007, payable to all stockholders of record as of March 31, 2007 within the month of July 2007; that Rohm Singapore shall receive the equivalent amount of Ten Million Five Hundred Fourteen Thousand Three Hundred Forty-Eight and 88/100 US Dollars (US$10,514,348.88); and that 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. EICSDT 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 such as Rohm Singapore . 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: "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" In accordance with the foregoing, the Philippines-Singapore tax treaty, particularly its Article 10 (2) (a), may apply to the subject dividends received by Rohm Singapore. Article 10 provides: "Article 10 DIVIDENDS 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 be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company'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 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. AEHTIC 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the above-cited provisions, the 15% preferential tax rate on dividends applies whenever the recipient is a company and during the part of the paying company'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 15% of the outstanding shares of the voting stock of the paying company was owned by the recipient company. In all other cases, the twenty-five percent (25%) preferential tax rate applies. In the instant case, considering that Rohm Singapore holds 20.13% of the subscribed common shares (also called ordinary share or voting share, which is a class of share that gives the stockholder the right to vote on matters of corporate policy and the composition of the members of the board of directors) of Rohm Philippines during the part of the latter's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, this Office is of the opinion and so holds that the dividend payments by Rohm Philippines to Rohm Singapore shall be subject to the preferential tax rate of 15%, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippine-Singapore tax treaty. (BIR Ruling No. 010-84 dated January 19, 1984; BIR Ruling No. ITAD-082-02 dated May 2, 2002; BIR Ruling No. DA-ITAD-024-08 dated April 9, 2008; BIR Ruling No. DA-ITAD-058-08 dated August 11, 2008; and BIR Ruling No. DA-ITAD-079-08 dated October 29, 2008.) This ruling is issued based on 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