ITAD BIR Ruling No. 049-13

March 5, 2013 ITAD BIR RULING NO. 049-13 Article 10, Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-053-10 Salvador & Associates Attorneys-at-Law 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue 1226 Makati City Attention: Mary Elizabeth M. Belmonte Reize Ann A. Tanchico Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on August 15, 2012, on behalf of Nestl S. A. ("Nestl-Swiss") , requesting confirmation that dividends paid by Nestl Philippines, Inc. ("Nestl-Phil") to Nestl-Swiss are subject to final withholding tax at the rate of 10 percent, pursuant to Article 10 of the Convention between the Republic of the Philippines and the Swiss Federation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that Nestl-Swiss , with principal address at Avenue Nestl 55 1800, Switzerland, is a resident of Switzerland within the meaning of the Philippines-Switzerland tax treaty per the Certificate of Residence issued on June 20, 2012 by the Department of Finance of the Canton of Vaud, Switzerland; that it is not registered either as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated November 24, 2011; and that, on the other hand, Nestl-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Barangay Niugan, Cabuyao, Laguna. It is further represented that during the special meeting of the Board of Directors of Nestl-Phil held on August 14, 2012, the Board of Directors declared from its unrestricted retained earnings, cash dividends of Seven Billion Five Hundred Sixty-Two Million Three Hundred Eighty-One Thousand One Hundred Twenty-Three and 11/100 Philippine currency (P7,562,381,123.11), pro rata to all stockholders of record as of record date (August 14, 2012); that per the Corporate Secretary's Certificate issued by Nestl-Phil on November 15, 2012, as of the declaration of the dividends and as of the date of its payment on August 17, 2012, Nestl-Swiss [including one (1) share of its eight (8) individual Trustees], holds 100 percent ownership of the authorized capital stock in Nestl-Phil; and that, per the Certification issued on September 7, 2012 by The Hongkong and Shanghai Banking Corporation Limited, payments of the subject dividends were remitted to Nestl-Swiss on August 17, 2012. ICAcaH It is finally represented, based on the certificate of no pending case issued by Nestl-Phil on August 15, 2012, that the transaction subject of the 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 of the taxpayer/s involved. 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 derived in the Philippines by a nonresident foreign corporation. 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 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%). 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" Thus, Article 10 of the Philippines-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides: EDHTAI "Article 10 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 (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 4. 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 taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions of Article 10, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation; and 15 percent if the shareholdings of the recipient company is below 10 percent of the capital of the paying company. In view thereof, considering that Nestl-Swiss owns more than 10 percent of the authorized capital stock of Nestl-Phil, this Office is of the opinion and so holds that the dividends paid by Nestl-Phil to Nestl-Swiss are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD-053-10 dated October 18, 2010) TaDAHE 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