ITAD BIR Ruling No. 061-10

November 3, 2010 ITAD BIR RULING NO. 061-10 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. 010-84; BIR Ruling No. DA-ITAD-024-08; BIR Ruling No. DA-ITAD-058-08; BIR Ruling No. DA-ITAD-079-08; BIR Ruling No. ITAD-082-02 Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: W. U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated December 4, 2009, on behalf of your client, United Technologies International Corporation Asia Private Limited (UTIC) , requesting confirmation of your opinion that the dividends declared and to be paid by Otis E & M Company Philippines, Inc. (OEM) to UTIC are subject to final withholding tax at the preferential rate of fifteen percent (15%) of the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. It is represented that UTIC is a corporation organized and existing under the laws of Singapore with principal address at 72 Anson Rd, #09-00 Anson House Singapore 079911 based on the Certificate of Residence issued by Ms. Chiam Yah Fang, Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated October 30, 2009; 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 November 23, 2009; that, on the other hand, OEM is a corporation organized and existing under the laws of the Philippines with principal address at 14/F Petron Mega Plaza, 358 Sen. Gil Puyat Avenue, Makati City. It is further represented that based on the Secretary's Certificate issued by OEM dated December 2, 2009, it is stated that as of December 1, 2009, UTIC is the registered owner of One Hundred Forty-Four Thousand Nine Hundred Ninety-Five (144,995) shares and beneficial owner through its nominees of Five (5) shares of the outstanding capital stock of OEM with a par value of PhP100.00 per share for a total par value of PhP14,500,000.00 which represents 100% of the outstanding and voting shares of OEM; that on December 1, 2009, the Board of Directors of OEM passed and adopted a resolution to declare cash dividends in the amount of PhP75,000,000.00, subject to such withholding tax, charges or any other taxes and charges imposable under the law, provided that the dividends shall be distributed and paid on December 15, 2009 thereof to all stockholders of record as of December 1, 2009; and 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 per Sworn Statement issued by OEM dated December 2, 2009. EAcIST 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 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." 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. xxx xxx xxx 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." 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. Since UTIC holds 100% of the total outstanding and voting shares of OEM during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, dividends received by UTIC shall be subject to the preferential tax rate of 15 percent, pursuant to the Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. 010-84 dated January 19, 1984; BIR Ruling No. DA-ITAD-024-08 dated April 9, 2008; BIR Ruling No. DA-ITAD-058-08 dated August 11, 2008; BIR Ruling No. DA-ITAD-079-08 dated October 29, 2009; BIR Ruling No. ITAD-082-02 dated May 2, 2002) 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. DaScAI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue