ITAD BIR Ruling No. 046-11

February 11, 2011 ITAD BIR RULING NO. 046-11 Article 10, Philippines-Germany tax treaty; BIR Ruling No. 559-88; BIR Ruling No. ITAD-052-02; BIR Ruling No. ITAD-109-02; BIR Ruling No. ITAD-171-02; BIR Ruling No. ITAD-144-03 Fortun Narvasa Salazar 23 Floor, Multinational Bancorporation Centre 6805 Ayala Avenue Makati City Attention: Atty. Roderick R.C. Salazar Atty. Joy Z. Manaog Atty. Joseph Benedict G. Gesmundo Gentlemen : This refers to your Tax Treaty Relief Application filed on December 10, 2010, requesting confirmation that dividends received by SPRENGSTOFF-VERWERTUNGS GmbH ("SVG") from ORICA NITRATES PHILIPPINES ("ORICA") are subject to 10 percent preferential tax rate pursuant to Article 10 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). It is represented that SVG is a nonresident foreign corporation organized and existing under the laws of Germany with principal office address at Mlheimer Strasse 5, 53840 Troisdorf, Germany; that SVG is a resident of Germany as evidenced by the Certificate of Residence dated November 26, 2010 issued by the Tax Office of Siegburg in Germany; that SVG is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company dated September 23, 2010 issued by the Securities and Exchange Commission ("SEC"); and that, on the other hand, ORICA is a domestic corporation with principal office address at Brgy. Bontis, Bacong, Negros Oriental, Philippines. It is further represented, based on Certificates issued by the Assistant Corporate Secretary of ORICA on November 30, 2010 and December 8, 2010, that on November 16, 2010, the Board of Directors of ORICA, at its special meeting, declared cash dividends of One Hundred Fifteen Million Three Hundred Thousand Pesos (Php115,300,000.00) to be divided among and in proportion to the respective shares of ORICA's stockholders of record as of November 16, 2010; that as of the date of record and date of payment of the dividends, SVG is a stockholder of ORICA with One Million One Hundred Eleven Thousand One Hundred Ninety Five (1,111,195) shares with a par value of One Hundred Pesos (P100.00) each, or a total of One Hundred Eleven Million One Hundred Nineteen Thousand Five Hundred Pesos (P111,119,500.00) worth of shares; that these shares are covered by Stock Certificate Nos. 21 and 30 corresponding respectively to 879,995 shares issued on June 28, 2006, and to 231,240 shares issued on December 3, 2009; and that these stockholdings of SVG comprise 96 percent of the total outstanding capital stock of ORICA. HaAISC It is finally represented that the dividends subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal, based on the Certification dated December 8, 2010 issued by the Managing Partner of Fortun Narvasa and Salazar Law Offices, as authorized by ORICA under a resolution approved by the Board of Directors of ORICA on November 26, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies to dividends received by a nonresident foreign corporation in the Philippines. 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, rents, royalties . . .: 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 such dividends may be exempt from income tax (or partially exempt if subject to reduced rate only) to the extent required by any treaty obligation on the Philippines, viz. : "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." In relation thereto, you invoke the provisions of the Philippines-Germany tax treaty. Paragraphs 1 and 2, Article 10 thereof, provide as follows: "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 the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx" Based on the above provisions, the Philippines may tax dividends paid by a Philippine company to a company which is a resident of Germany at a rate not exceeding: (a) 10 percent of the gross amount of dividends if the latter holds directly at least 25 percent of the capital of the Philippine company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. cCaSHA Accordingly, since SVG holds directly 96 percent of the total outstanding capital stock of ORICA, which is even more than the required holding of 25 percent, such dividends paid by ORICA to SVG are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Germany tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988; BIR Ruling No. ITAD-052-02 dated April 16, 2002; BIR ITAD-109-02 dated May 30, 2002; BIR Ruling No. ITAD-171-02 dated October 2, 2002; BIR Ruling No. ITAD-144-03 dated September 25, 2003; BIR Ruling No. ITAD-181-03 dated November 25, 2003) 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