ITAD BIR Ruling No. 048-12

February 10, 2012 ITAD BIR RULING NO. 048-12 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 219-11 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Emmanuel C. Alcantara General Counsel/Head, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on September 28, 2011, on behalf of your client, TI (Philippines), Inc. ("TIPI"), requesting confirmation that the dividend payments of TIPI to Texas Instruments Holland B.V. ("TI-Holland") are subject to the preferential tax rate of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). Facts It is represented that TI-Holland, situated at Rutherfordweg 102 3542 CG Utrecht, The Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, per the Declaration of Residence issued by the Inspector of the Tax Administration of the Netherlands on October 10, 2011; that TI-Holland is a corporation organized and existing under the laws of the Netherlands with an authorized capital of Five Hundred Thousand Euros, (EUR500,000), divided into one thousand (1,000) shares, having a nominal value of Five Hundred Euro (EUR500) each; that TI-Holland is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 22, 2011; and that, on the other hand, TIPI is a corporation organized and existing under the laws of the Philippines with principal address at PEZA Loakan Road, Baguio City, Philippines. It is further represented, per Secretary's Certificate issued by TIPI dated September 26, 2011, that on September 16, 2011, the Board of Directors declared cash dividends of US$5,700,000.00 out of its retained earnings to the stockholders of record as of the date of the meeting, payable on September 30, 2011; and that TI-Holland is the owner of 10,099,964 common shares of TIPI with a total par value of Php1,009,996,400.00, representing 99.99% of the total shares of TIPI. TADaCH 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 proceeding, or judicial appeal per sworn statement issued by TIPI dated September 26, 2011. Ruling 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 income derived in the Philippines 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. 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." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, may apply to the instant case. It provides: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. aTEAHc 2. However, such dividends may also be taxed in the 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 percent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; b) 15 percent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. 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 participating in profits, as well as income from debt-claims participating profits and income from other corporate rights which is subjected to the same taxation treatment as 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 aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Such being the case, since TI-Holland holds 99.99% of the total shares of TIPI, this Office is of the opinion and so holds that the dividend payments by TIPI to TI-Holland shall be subject to the preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 219-11 dated September 1, 2011) 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. IaTSED Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue