ITAD BIR Ruling No. 055-11

February 18, 2011 ITAD BIR RULING NO. 055-11 Article 10, Philippines-Singapore Tax Treaty; BIR Ruling No. 010-84; BIR Ruling No. ITAD 025-10; BIR Ruling No. ITAD 030-10; BIR Ruling No. ITAD 060-10 GNCA Holdings, Inc. Unit 322, LRI Design Plaza 210 N. Garcia St. Makati City Attention: Ma. Leah M. Cruz Representative Gentlemen : This refers to your application for tax treaty relief filed on November 15, 2010, on behalf of Lehman Brothers South East Asia Investments Pte. Ltd. (hereinafter referred to as "LBSAI"), requesting confirmation that dividend payments made by Hyperion Real Estate, Inc. (hereinafter referred to as "HREI") to LBSAI are subject to 15 percent preferential tax rate pursuant to 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 (hereinafter referred to as the "Philippines-Singapore tax treaty" ). DAEICc It is represented that LBSAI, with address at Investments Pte. Ltd. 9 Raffles PL #32-00 Singapore 048619, is a resident of Singapore per the Certification of Residence for the Purpose of Claiming Benefit under the Singapore/Philippines DTA for Sale of Subsidiary issued by the Inland Revenue of Singapore dated October 20, 2010; that it is a foreign corporation duly incorporated on September 8, 2004 under the laws of Singapore based on its Memorandum and Articles of Association; that LBSAI is a private company limited by shares in the Singapore, with authorized capital of US$100.00, divided into 100 ordinary shares of US$1.00 each; that LBSAI is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on September 21, 2010; and that, on the other hand, HREI is a domestic corporation located at the Unit 1615, Tower One, Exchange Plaza, Ayala Avenue, Makati City. It is further represented, per Secretary's Certificate issued by HREI dated September 24, 2010, that, at a special meeting by the Board of Directors of HREI on September 1, 2010, a resolution was unanimously approved declaring cash dividends in the amount of THIRTY MILLION PESOS (Php30,000,000.00) out of the unrestricted retained earnings of HREI as of December 31, 2009, in favor of LBSAI, the other stockholders holding nominal shares having waived their right thereto; and that said dividends shall be paid on or before December 15, 2010; that as of the date of the Board meeting on September 1, 2010, out of the Php10,600,000.00 total outstanding capital stock of HREI, LBSAI owns 10,600,000 shares inclusive of five (5) shares held in trust by LBSAI's nominee-directors, acquired by way of subscription upon HREI's incorporation, with a par value per share of P1.00, equivalent to an amount of Php10,600,000.00, hence a 100% ownership of HREI's shares, per the Secretary's Certificate issued by HREI dated September 23, 2010. It is finally represented, based on the Sworn Statement executed by the Corporate Secretary of HREI on October 7, 2010, 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 of 1997 (Tax Code of 1997), as amended, applies in general to dividend income 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 . . ., dividends, . . .: 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 that any income may be exempt to the extent required by any treaty obligation binding upon the Philippine Government, 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. AcHSEa xxx xxx xxx" With respect to a treaty, what you invoke for this purpose is the Philippines-Singapore tax treaty. Article 10 thereof 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 provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 4. 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" Under paragraph 2 of Article 10, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 15 percent of the gross amount of the dividends if the recipient is a company (including a partnership) which holds at least 15 percent of the outstanding shares of the voting stock of the company paying the dividends during the part of the company's taxable year which precedes the date of payment of the dividends and during the whole of its prior taxable year (if any); and (b) 25 percent of the gross amount of the dividends in all other cases. Accordingly, the cash dividends declared by HREI on September 1, 2010, and paid on or before December 15, 2010, amounting to Thirty Million Pesos (Php30,000,000.00), in favor of LBSAI shall be subject to income tax in the Philippines at the rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2, Article 10 of the Philippines-Singapore tax treaty. The lower rate applies since LBSAI has been holding 100 percent of the outstanding shares of stock of HREI upon its incorporation. (BIR Ruling 10-84 dated January 19, 1984; BIR Ruling No. DA-ITAD 25-10 dated February 19, 2010; BIR Ruling No. DA-ITAD 30-10 dated August 27, 2010; BIR Ruling No. DA-ITAD 060-10 dated June 16, 2010) aESIHT 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