ITAD BIR Ruling No. 061-11

February 22, 2011 ITAD BIR RULING NO. 061-11 Article 10, Philippines-China tax treaty Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig City Attention: Dennis G. Dimagiba Maria Ana Camila C. Jacinto Gentlemen : This refers to your tax treaty relief application (TTRA) filed on December 13, 2010 requesting confirmation that the dividend payment by the Bank of the Philippine Islands ("BPI") to Best Investment Corporation ("BIC") is subject to the 15 percent preferential tax rate, pursuant to Article 10 (2) (b) of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-China tax treaty"). THSaEC It is represented that BIC, with address at Suite 936, No. 2 Building, No. 1 Complex, Nao Shi Kou Da Jie, Xicheng District, Beijing People's Republic of China, is a corporation organized and existing under the laws of China, and is a resident of China per the Certificate of Chinese Fiscal Resident issued by the Director of Xicheng District Office, SAT, Beijing dated June 28, 2010; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 6, 2010; and that, on the other hand, BPI is a corporation organized and existing under the laws of the Philippines with principal address at BPI Building, Ayala corner Paseo de Roxas, Makati City. It is further represented, per Secretary's Certificate issued by BPI on December 8, 2010, that as of December 4, 2010, the total outstanding shares of common stock of BPI beneficially owned by BIC is 20,016,374 shares equivalent to 0.5628% of the issued and outstanding common shares of BPI; that at the regular meeting of the Board of Directors of BPI on October 20, 2010, a resolution was unanimously adopted and approved declaring a regular cash dividend of Ninety Centavos (P0.90) per share, for the second semester of the year 2010, on the total outstanding Common shares of the capital stock of BPI, payable to all Common shares Stockholders of BPI of record as of the 15th day from receipt by BPI of the approval by the Bangko Sentral ng Pilipinas (BSP) of the said dividend declaration, and distributable on the 15th day from said record date. It is finally represented, per Sworn Certification issued by BPI dated December 7, 2010, that the 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 proceeding, or judicial appeal. 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 income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 interest, 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 subparagraph 5(c): 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. (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." Thus, the provisions of Article 10 of the Philippines-China tax treaty, which you invoke, may apply to the instant case. 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 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 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. 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, 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 laws of the State of which the company making the distribution is a resident." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of China at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent of the capital of the paying company paying the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof, in all other cases. In view of the foregoing, inasmuch as BIC holds only 0.5628% of the issued and outstanding capital stock of BPI, which is less than the required minimum shareholdings of 10 percent, the said dividends paid by BPI to BIC are subject to the 15 percent preferential tax rate prescribed under Article 10 (2) (b) of Philippines-China tax treaty. 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