ITAD BIR Ruling No. 053-10

October 18, 2010 ITAD BIR RULING NO. 053-10 Article 10 (2) (a) of the Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-009-10 Philip Morris Philippines Manufacturing Incorporated MCC P.O. Box 2338 6766 Makati City Attention: Ms. Stella G. Calayag Tax Manager Gentlemen : This refers to your letter dated October 30, 2009, requesting confirmation on your opinion that the dividends paid by Philip Morris Philippines Manufacturing Inc. (PMPMI) to FTR Holding S.A. (FTRH) are subject to a preferential tax rate of 10 percent pursuant to the Philippines-Switzerland tax treaty. It is represented that PMPMI is a corporation organized and existing under the laws of Switzerland with principal address at Quai Jeanrenaud 3, CH-2000 Neuchatel, Switzerland per duly authenticated notarized Statement on the Tax Status of the Business issued by the Corporate Tax Office, Service Des Contributions Office De Taxation dated July 28, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated October 12, 2009; that PMPMI is a corporation organized and existing under the laws of the Philippines with principal address at 27/F The Enterprise Center, Paseo de Roxas cor. Ayala Avenue, Makati City. It is further represented that as of October 23, 2009, FTRH owns 279,995 common shares equivalent to the amount of PhP279,995,000.00 which represents 52.8292% of the capital stock of PMPMI; that at the Special Meeting of the Board of Directors of PMPMI on October 23, 2009, it was resolved that the Board authorizes the Corporation to declare cash dividends in favor of its preferred stockholders of Two Billion Nine Hundred One Million Six Hundred Thousand Pesos (PhP2,901,600,000.00) which is equivalent to dividend rate of 232.1% per annum of the aggregate par value of the preferred shares, from out of the Corporation's retained earnings as of December 31, 2008; that the Board of PMPMI authorizes the Corporation to distribute the entirety of such dividends to preferred stockholders of record as of September 30, 2009 in accordance with the following schedule: TAacIE Date Amount November 16, 2009 PhP967,200,000.00 November 19, 2009 PhP967,200,000.00 November 25, 2009 PhP967,200,000.00 That the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per certification issued by PMPMI dated December 18, 2009. 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 which 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 . . ., dividends, . . .: 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. xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides "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. cASIED xxx xxx xxx 3. 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." Based on the aforequoted provisions, 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, since FTRH directly owns more than 10 percent of the capital stock of PMPMI, this Office is of the opinion and so holds that the dividend payments by PMPMI to FTRH are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD-009-10 dated June 3, 2010) 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