ITAD BIR Ruling No. 061-14

June 9, 2014 ITAD BIR RULING NO. 061-14 Article 11, Philippines-US Tax Treaty Navarro Amper & Co. 19th Floor Net Lima Plaza 5th Avenue corner 26th Street Bonifacio Global City, Taguig Attention: Walter L. Abela Jr. Representative Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 17 April 2013 , requesting confirmation that the cash dividends paid by Philippine Long Distance Telephone Company ("PLDT") to Invesco Asia Pacific Growth Fund ("Invesco") , are subject to the preferential tax rate of 25 percent (25%) pursuant to Article 11 (2) (a) of The Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-US tax treaty") . 1 It is represented that Invesco is a corporation organized and existing under the laws of United States of America and is a resident thereof with business address at Greenway Plaza, Suite 1000, Houston, TX, 77406 as evidenced by the Certificate of Residence dated 22 January 2013, which was authenticated by the Consul General of the Republic of the Philippines for the District of Columbia and the States of Alabama, Florida, Georgia, Kentucky, Maryland, North Carolina, South Carolina, Tenessee, Virginia and West Virginia dated 20 March 2013; that Invesco is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated 22 April 2013; and that, on the other hand, PLDT is a corporation organized and existing under the laws of the Philippines with business address at Ramon Cojuangco Building Makati avenue. aSATHE It is further represented as certified by the Corporate Secretary of PLDT executed on 23 February 2013, in a meeting of the Board of Directors of PLDT held on 05 March 2013, the latter declared cash dividends as of 31 December 2012 as follows: a. Final regular dividend of P60.00 per outstanding share of the Company's Common Stock, payable on 18 April 2013 to the holders of record on 19 March 2013; b. Special dividend of P52.00 per outstanding share of the Company's Common Stock, payable on 18 April 2013 to the holders of record on 19 March 2013. It is further represented that as of 19 March 2013, Invesco holds 282,965 shares of stock of PLDT, or equivalent to 0.13% of its outstanding capital stock; that the payment of the subject dividends was made by Invesco through Deutsche Bank AG Manila ("Deutsche Bank") on 18 April 2013, as evidenced by a Certification issued by Deutsche Bank executed on 04 June 2013. It is finally represented that the dividends subject of this TTRA 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 issued by the Vice President and Head, Tax Management Sector of PLDT executed on 12 April 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends paid to Invesco are subject to income tax at the rate of 30 percent, thus: "SEC. 28. Rates of Income Tax on Foreign Corporations . STHAaD 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 percent (30%) 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 subparagraph 5(c) and (d) above." n However, under Section 32 (B) (5) of the Tax Code, such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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, you invoke the Philippines-US tax treaty. Paragraphs 1 and 2 of Article 11 thereof provide: CDEaAI "Article 11 Dividends 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed a) 25 percent of the gross amount of the dividend; or b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation'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 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation." Under paragraph 2 (b) of Article 11, dividends arising in the Philippines and paid to a resident of the US may be taxed in the Philippines at a rate not to exceed 20% of the gross amount of the dividends if the corporation recipient of the dividends holds at least 10% of the outstanding shares of the voting stock of the corporation paying the dividends. Accordingly, since Invesco holds only 0.13% of the outstanding share of PLDT the dividends paid by Invesco to PLDT are subject to income tax at the rate of 25 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 11 of the Philippines-US tax treaty. 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. ITScAE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Its provisions on taxes apply on income derived or which accrued beginning January 1, 1983. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.