ITAD BIR Ruling No. 051-16

April 4, 2016 ITAD BIR RULING NO. 051-16 Article 10, Philippines-Singapore tax treaty Panasonic Electric Works Sales Philippines Corporation 4th Floor, Sycip Law Center 105 Paseo de Roxas Makati City Attention: Kazuhito Takahashi Director & Treasurer Gentlemen : This refers to your tax treaty relief application filed on March 1, 2012, requesting confirmation that the dividend paid by Panasonic Electric Works Sales Philippines Corporation ("Panasonic-Phil") to Panasonic Electric Works Asia Pacific Pte. Ltd. ("Panasonic-Singapore") is subject to final withholding tax at the preferential rate of 15 percent of the gross amount of dividends, pursuant to Article 10 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 Panasonic-Singapore is a corporation organized and existing under the laws of Singapore, and is a resident thereof based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated January 6, 2012; 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 February 28, 2012; and that, on the other hand, Panasonic-Phil is a corporation organized and existing under the laws of the Philippines. It is further represented that on May 31, 2011, the Board of Directors of Panasonic-Phil approved the declaration of cash dividends in the amount of Fifteen Million Five Hundred Ninety-Two Thousand One Hundred Sixty-Two and 81/100 (P15,592,162.81) in favor of all stockholders of record as of April 30, 2011 in proportion to, and on the basis of, the outstanding shares of stock of Panasonic-Phil respectively held by the latter's stockholders; that the dividends are payable within the fiscal year 2011 (April 1, 2011 to March 31, 2012); that as of September 28, 2001 and as of the date in which the dividends will be paid, Panasonic-Singapore is the legal and beneficial owner of 102,555 common shares (including five [5] common shares covered by separate Declaration of Trusts held by its nominee directors in Panasonic-Phil ) with a total par value of PhP10,255,500.00, which represents 100% of the shares of Panasonic-Phil ; that the said shares were acquired by Panasonic-Singapore upon the incorporation of Panasonic-Phil on September 28, 2001. 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. CAIHTE In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, 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. (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." 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. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 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. xxx xxx xxx 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. DETACa xxx xxx xxx" 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, or 25 percent in all other cases. In view of the foregoing and considering that Panasonic-Singapore , a resident of Singapore with no fixed place of business in the Philippines, holds 100 percent of the shares of Panasonic-Phil during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year or since September 28, 2001, the dividend paid by Panasonic-Phil to Panasonic-Singapore is subject to the preferential tax rate of 15 percent, pursuant to Article 10 (2) (a) of the Philippines-Singapore 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue