ITAD BIR Ruling No. 050-15

March 25, 2015 ITAD BIR RULING NO. 050-15 Article 9, Philippines-United Kingdom tax treaty Baniqued & Baniqued Attorneys at Law 8/F Jollibee Center, San Miguel Avenue Pasig City, 1605 Attention: Terence Conrad H. Bello Dane-Daniel O. Umali Gentlemen : This refers to your tax treaty relief application filed on December 13, 2013, on behalf of Glaxo Group Limited ("Glaxo Group"), requesting confirmation that the dividends paid by GlaxoSmithKline Philippines, Inc. ("GlaxoSmithKline") to Glaxo Group are subject to the preferential tax treaty rate of 15 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty"). Facts It is represented that Glaxo Group is a non-resident foreign corporation organized and existing under the laws of the United Kingdom with principal address at 980 Great West Road, Brentford, Middlesex TW8 9GS based on the consularized and notarized Certificate of Residency issued by the HM Revenue & Customs of the United Kingdom and consularized and notarized Memorandum of Association. The company Glaxo Group is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on December 12, 2013. On the other hand, GlaxoSmithKline is a domestic corporation with principal address at No. 2266 Don Chino Roces Avenue, Makati City. It is further represented that on December 10, 2013, the Board of Directors of GlaxoSmithKline declares a cash dividend out of GlaxoSmithKline unrestricted retained earnings as of December 31, 2012, amounting to P1,242,004,932.00 be paid to its stockholders of record as of December 10, 2013, payable within the month of December 2013. As of December 31, 2013 Glaxo Group is the registered owner of 100,700,649 common shares and owns seven shares in the names of its nominee directors of the corporation equivalent to 75.71 percent of the voting capital stock of GlaxoSmithKline. It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the sworn statement issued by GlaxoSmithKline dated December 13, 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997"), as amended, dividends paid to Glaxo Group are subject to income tax at the rate of 30 percent, thus: "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 interests, 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%). ACTIcS xxx xxx xxx" However, Section 32 (B) (5) of the Code provides that such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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" For this purpose, you invoke the Philippines-United Kingdom tax treaty. Paragraph 1, sub-paragraphs (a) and (b) of Article 9 on Dividends thereof provide: "Article 9 Dividends 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. 2. Dividends derived from a company which is a resident of the United Kingdom by a resident of the Philippines may be taxed in the Philippines. Such dividends may also be taxed in the United Kingdom and according to the laws of the United Kingdom, but where such dividends are beneficially owned by a resident of the Philippines the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the United Kingdom may be taxed in the Philippines at a rate (a) not to exceed 15% if the company recipient of the dividends holds directly at least 10% of the voting shares of the paying company; and (b) 25% in all other cases. Considering that Glaxo Group owns 75.71% of the total capital stock of GlaxoSmithKline, the dividends paid by GlaxoSmithKline to Glaxo Group are subject to the preferential tax rate of 15 percent of the gross amount thereof pursuant to Article 9, paragraph 1, sub-paragraph (a) of the Philippines-UK tax treaty. 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. AEcIaH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue