ITAD BIR Ruling No. 054-11

February 18, 2011 ITAD BIR RULING NO. 054-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 56-10; BIR Ruling No. ITAD 46-10 Manabat Sanagustin & Co. Certified Public Accountants 22/F, Philamlife Tower, 8767 Paseo de Roxas Makati City 1226 Attention: Robert L. Tan Partner, Tax Gentlemen : This refers to your letter dated July 13, 2010, on behalf of your client, DUTCH CONTACT CENTERS, BV (for brevity, DCC), requesting confirmation that dividends to be paid to DCC by TELEPHILIPPINES, INC. (Telephilippines) are subject to the 10% preferential tax rate under Article 10 (2) (a) of the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Philippines-Netherlands tax treaty). HAEIac Basic Facts It is represented that DCC is a corporation organized and existing under the laws of the Netherlands, based on its Articles of Association; that the objects of DCC are (a) to incorporate, to participate in any way whatsoever in, to manage, to supervise businesses and companies, (b) to finance businesses and companies, (c) to borrow, to lend and to raise funds, including the issue of bonds, promissory notes or other securities or evidence of indebtedness as well as to enter into agreements in connection with the aforementioned activities, (d) to render advice and services to businesses and companies with which the Company forms a group and to third parties, (e) to grant guarantees, to bind DCC and to pledge its assets for obligations of businesses and companies with which it forms a group and on behalf of third parties, (f) to acquire, alienate, manage and exploit registered property and items of property in general, (g) to trade in currencies, securities and items of property in general, (h) to develop and trade in patents, trademarks, licenses, know-how and other industrial property rights, and (i) to perform any and all activities of an industrial, financial or commercial nature and to do what is connected therewith or may be conducive thereto; that the authorized capital of DCC is 90,000 Euros, divided into 9,000 shares, each with a par value of 10 Euros; that DCC is situated at Orfeoshouw 70, 2726 JH, Zoetermeer, the Netherlands; that DCC is not registered as a corporation or as a partnership in the Philippines, based on the Certification of Non-Registration dated May 31, 2010 issued by the Securities and Exchange Commission; and that, on the other hand, Telephilippines is a corporation organized and existing under the laws of the Philippines, situated at 12th Floor, Octagon Building, San Miguel Avenue, Ortigas Center, Pasig City, Philippines. It is further represented that on April 28, 2010, the Board of Directors of Telephilippines, at its meeting, passed and approved a resolution for Telephilippines to declare cash dividends in the amount of Php80.00 per share, or an aggregate of Php292,800,000.00, in favor of the stockholders of record of Telephilippines as of April 28, 2010, and payable on July 31, 2010, based on the Certificate dated June 29, 2010 issued by the Corporate Secretary of Telephilippines; and that as of April 28, 2010, being the date of record for the stockholders entitled to the dividends, and as of July 31, 2010, being the date of payment of the dividends, DCC owns 1,463,995 shares in Telephilippines with a par value of Php100.00 each, or a total par value of Php146,399,500.00, representing 39.99% of the issued and outstanding capital stock of Telephilippines, based on the Certification dated October 1, 2010 issued by the same Corporate Secretary. It is finally represented that the dividends subject of the application for tax treaty relief are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification dated August 18, 2010 issued by the Finance Manager of Telephilippines. Ruling In reply, please be informed that a foreign corporation like DCC, whether or not engaged in trade or business in the Philippines, is taxable only on income derived in the Philippines. Section 23 (F) of the National Internal Revenue Code of 1997, (Tax Code of 1997), as amended, provides: "SEC. 23. General Principles of Income Taxation in the Philippines. Except when otherwise provided in this Code: xxx xxx xxx (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines." In relation thereto, Section 28 (B) (1) and (5) (b) of the Tax Code of 1997, as amended, provides: "SEC. 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 subparagraphs 5(c). Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." HCITDc xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. xxx xxx xxx (b) Intercorporate Dividends. A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on dividends as provided in this subparagraph; Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends;" However, any income derived by DCC in the Philippines may be exempt from income tax in the Philippines (or partially exempt if subject only to a reduced income tax rate) if such income is exempt (or partially exempt) pursuant to a treaty obligation binding upon the Philippine government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "SEC. 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." With respect to a treaty, what you invoke for this purpose is the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof rule on the taxation of dividends arising in the Philippines and derived by a resident of the Netherlands, thus: "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. 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 per cent 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 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases." Under paragraph 2, dividends arising in the Philippines and derived by a resident of the Netherlands may be subject to income tax in the Philippines at a rate not to 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, and (b) 15 percent of the gross amount of the dividends in all other cases. DSTCIa Accordingly, since DCC is a company whose capital is divided into shares and since it holds directly at least 10 percent of the capital of Telephilippines (in fact, it holds 39.99% of such capital of Telephilippines), such dividends to be paid by Telephilippines to DCC are subject to income tax at the rate of 10 percent of the gross amount thereof. (BIR Ruling No. ITAD 56-10 dated October 22, 2010 and BIR Ruling No. ITAD 46-10 dated October 5, 2010) . 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