ITAD BIR Ruling No. 058-13

March 13, 2013 ITAD BIR RULING NO. 058-13 Article 10, Philippines-France tax treaty, as amended Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorney at Law 21st Floor, 8767 Paseo de Roxas Makati City Attention: Atty. Priscilla B. Valler Atty. Maria Tara A. Mercado Authorized Representatives Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on July 24, 2012, on behalf of Veolia EAU-Compagnie Generale Des Eaux ("Veolia EAU") , requesting confirmation that dividend payments made by Veolia Water Philippines, Inc. ("Veolia Water") to Veolia EAU are subject to 10 percent preferential tax rate pursuant to the Philippines-France tax treaty, as amended. 1 It is represented that Veolia EAU, with address at 52 Rue D' Anjou-75384 Paris Cedex 08, is a resident of France under the provisions of the Philippines-France tax treaty per Certificate of Residence issued by the French tax authority on March 7, 2012; that Veolia EAU is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 6, 2012; and that, on the other hand, Veolia Water is a domestic corporation duly organized and existing under Philippine laws, located at the 21st Floor, Philippine AXA Life Center, Sen. Gil Puyat Avenue, Makati City. It is further represented, as shown in the Secretary's Certificate issued by Veolia Water dated July 20, 2012, that during the special meeting of the Board of Directors, they approved a resolution declaring cash dividend in the total amount of One Hundred Ninety-two Million Pesos (Php192,000,000.00) to all stockholders of record as of June 30, 2012 proportionate to the shareholdings of the stockholder as of June 30, 2012; that Veolia EAU beneficially owns 76,086 common shares with a total par value of Php7,608,600.00, representing 100% of the total outstanding capital stock of Veolia Water ; and that these shares were acquired by Veolia EAU on June 22, 1999 through purchase. IEAacT Furthermore, it is represented that as of July 30, 2012 Veolia Water has receivables due from Veolia EAU in the amount of Php179,243,129.25; that Veolia Water and Veolia EAU entered into an Agreement on August 6, 2012 that the dividend proceeds amounting to Php172,800,000.00 shall be the allocated as partial payment by Veolia EAU of Veolia Water 's receivables; that upon offsetting the amount corresponding to the dividend proceeds against the partial payment of the Veolia Water receivables on August 6, 2012, Veolia EAU shall be deemed to have received the dividends from Veolia Water and Veolia Water shall be deemed to have fully paid the dividends to Veolia EAU. Finally, it is represented that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved per the Sworn Statement issued by Veolia Water dated July 20, 2012. 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 dividends 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, rents, royalties . . .: 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: EHACcT "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" In relation thereto, Article 10 of the Philippines-France tax treaty, as amended, may apply to the instant case. It provides that: "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. cSTHaE 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) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' 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 the State of which the company making the distribution is a resident. THcEaS xxx xxx xxx" Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of France at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividend and 15 percent in all other cases. Considering that based on the certification issued by the Corporate Secretary of Veolia Water dated July 20, 2012, Veolia EAU owns 100% shares in Veolia Water , which is more than the 10 percent shareholding requirement of the total shares issued by that company, then the dividends paid by Veolia Water to Veolia EAU are subject to preferential tax rate of 10 percent of the gross amount of dividends, pursuant to Article 10 (2) (b) of the Philippines-France tax treaty, as amended. 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 Footnotes 1. Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.