ITAD BIR Ruling No. 066-16

April 5, 2016 ITAD BIR RULING NO. 066-16 Article 11, Philippines-United States tax treaty R. G. Manabat & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Attention: Herminigildo G. Murakami Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on June 5, 2014, requesting confirmation that dividends paid to Oppenheimer Developing Markets Fund ("Oppenheimer") by SM Prime Holdings, Inc. ("SM") are subject to final withholding tax rate of 25 percent under Article 11 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-United States tax treaty") . It is represented that Oppenheimer is a resident of the United States based on the certification issued by the Internal Revenue Service, Department of the Treasury dated March 4, 2014; 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 May 26, 2014; and that, on the other hand, SM is a corporation organized and existing under the laws of the Philippines. It is further represented that at the regular meeting of the Board of Directors of SM held on April 15, 2014, the Board of Directors of SM declared cash dividends for the year 2014 in the amount of 19 centavos (Php0.19) per common share or a total of P5.3 Billion in favor of stockholders of record as of May 15, 2014, payable on or before June 10, 2014; that as of record date and payment date of the dividends, Oppenheimer is the beneficial holder of 732,394,672 common shares with a par value of 1.00 which represents 2.632701 percent ownership in SM. It is finally represented, per the Certification issued on October 23, 2015 issued by SM, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, 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 dividends derived in the Philippines 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 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%)." cTDaEH 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. xxx xxx xxx" In this particular case, you invoked Article 11 of the Philippines-United States tax treaty. It provides: "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. xxx xxx xxx 4. Paragraph 2 shall not apply if the recipient of dividends derived from sources within one of the Contracting States, being a resident of the other Contracting State, carries on business in the first-mentioned Contracting State through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 8 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply. 5. The term "dividends" as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident. . . ." Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident of the United States at a rate not exceeding 20 percent of the gross amount of the dividends 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 were owned by the recipient corporation; or 25 percent, in all other cases. In view thereof and considering that Oppenheimer , a resident corporation of the United States, holds only 2.632701 percent ownership in SM, dividends paid by SM to Oppenheimer are subject to the preferential tax rate of 25 percent pursuant to Article 11 (2) (a) of Philippines-United States 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. cSaATC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue