ITAD BIR Ruling No. 048-11

February 11, 2011 ITAD BIR RULING NO. 048-11 Article 10 (2) (b), Philippines-Singapore tax treaty; BIR Ruling No. ITAD-31-99; BIR Ruling No. ITAD-45-04; BIR Ruling No. ITAD-23-04 DBS Manila Representative Office 18 Floor, BPI Main Building 6768 Ayala Avenue corner Paseo de Roxas Makati City Attention: Edgardo Legarda Chief Representative-DBS Manila Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on December 10, 2010, requesting confirmation that the dividend payments made by Bank of the Philippine Island ("BPI") to DBS Bank Ltd. ("DBS") are subject to final withholding tax at the preferential rate of 15 percent, pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . It is represented that DBS is a corporation organized and existing under the laws of Singapore and is a resident of Singapore, with principal address at 6 Shenton Way Singapore 068809, based on the Certificate of Residence issued by Ms. Chiam Yah Fang, Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated April 3, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 29, 2010; and that, on the other hand, BPI is a corporation organized and existing under the laws of the Philippines with principal address at 6768 BPI Building, Ayala Avenue corner Paseo de Roxas, Makati City 1226. It is further represented, based on the Secretary's Certificate issued by BPI dated December 9, 2010, that as of December 4, 2010, DBS is the beneficial owner of 309,278,747 common shares with a par value of PhP10.00 per share with a market value of P17,953,631,263.35 at P58.05 per share or 8.6967% of the issued and outstanding common shares of BPI; that at the regular meeting held on October 20, 2010, the Board of Directors of BPI passed a resolution declaring a regular cash dividend of the capital stock of BPI, payable to all common shares stockholders of BPI of record as of the 15th day from the receipt by BPI of the approval by the Bangko Sentral ng Pilipinas (BSP) of the said dividends declaration and distributable on the 15th day from said record date. aADSIc It is finally represented that the issue or transaction subject of this 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 per Sworn Certification issued by BPI dated December 7, 2010. 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. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (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 this particular case, you invoked Article 10 of the Philippines-Singapore tax treaty. It 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. 3. 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." (emphasis supplied) AICEDc Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any; and 25 percent in all other cases. Accordingly, since DBS holds only 8.6967% of the total outstanding and common shares of BPI, such dividends received by DBS from BPI shall be subject to the preferential tax rate of 25 percent, pursuant to the Article 10 (2) (b) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-31-99 dated October 7, 1999; BIR Ruling No. ITAD-45-04 dated May 3, 2004; BIR Ruling No. ITAD-23-04 dated March 9, 2004) 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