ITAD BIR Ruling No. 047-11

February 11, 2011 ITAD BIR RULING NO. 047-11 Article 10 (2) (b) Philippines-China tax treaty Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig City, Philippines 1634 Attention: Dennis G. Dimagiba and Maria Anna Camila C. Jacinto Gentlemen : This refers to your tax treaty application filed on January 17, 2010 requesting confirmation that the withholding tax rate on the dividends paid to Best Investment Corporation ("BIC") by Ayala Corporation ("AC") is 15 percent pursuant to Article 10 (2) (b) of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-China tax treaty") . It is represented that BIC is a corporation duly organized and existing under the laws of the People's Republic of China with principal business address at Suite 936, No. 2 Building, No. 1 Complex, Nao Shi Kou Da Jie, Xicheng District, Beijing, P.R. China per its Articles of Association; that it is a fiscal resident in China for purposes of taxation as certified by Mr. Gao YongJie, the director of Xicheng district office of the State Administration of Taxation on June 28, 2010; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company dated July 6, 2010 issued by the Securities and Exchange Commission; and that AC, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with office address at the 34th Floor Tower One, Ayala Triangle, Ayala Avenue, Makati City, Philippines. It is further represented that on December 10, 2010, the Board of Directors of AC unanimously passed and approved a resolution declaring payment of the regular cash dividend for the second semester ending December 31, 2010 at the rate of PHP2.00 per share, to all shareholders of AC's common shares as of January 7, 2011, payable on February 2, 2011; that as per certification issued by the Assistant Corporate Secretary of AC, BIC beneficially owns 963,670 common shares constituting 0.1984% of the issued and outstanding shares of AC as of December 10, 2010; and that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Assistant Corporate Secretary dated January 14, 2011. DEIHSa In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended, applies in general to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax or partially exempt if subject to reduced rate only pursuant to a treaty obligation binding upon the Philippine government. It 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." Hence, the provisions of Article 10 of the Philippines-China tax treaty, which you invoked, may apply. Under Article 10 (2) (b) of the treaty, dividends paid to a company which is a resident of the People's Republic of China and which does not have a permanent establishment in the Philippines will be taxed at a preferential tax rate not exceeding 15 percent of the gross amount of dividends in cases where the recipient is a company that does not hold at least 10 percent of the capital of the company paying the dividends, viz. : "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 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 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. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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 laws of the State of which the company making the distribution is a resident. DAEcIS xxx xxx xxx" Inasmuch as BIC holds only 963,670 common shares or 0.1984% of the issued and outstanding capital stock of AC, which is less than the required minimum shareholdings of 10 percent, this Office is of the opinion, and hereby holds, that the said dividends paid by AC to BIC are subject to the 15 percent preferential tax rate prescribed under Article 10 (2) (b) of Philippines-China tax treaty. This ruling is issued on the basis of the foregoing 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