ITAD BIR Ruling No. 067-11

February 25, 2011 ITAD BIR RULING NO. 067-11 Article 10 (2) (a), Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 Pepsi-Cola Products Philippines, Inc. Km. 29 National Road Tunasan, Muntinlupa City 1773 Attention: Redentor R. Gabinete Tax Director Gentlemen : This refers to your letter dated October 23, 2008, requesting for a preferential tax rate on the dividends to be paid by Pepsi-Cola Products Philippines, Inc. ("Pepsi-Cola") to Quaker Global Investments B.V. ("Quaker Global"), pursuant to the Philippines-Netherlands tax treaty. CacISA It is represented that Quaker Global is a corporation organized and existing under the laws of the Netherlands with principal address at Zonnebaan 35, 3542 EB Utrecht, The Netherlands; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 15, 2008; that Pepsi-Cola is a corporation organized and existing under the laws of the Philippines with principal address at Km. 29, National Road, Tunasan, Muntinlupa City 1773; that as of September 30, 2008, Quaker Global is a stockholder of Pepsi-Cola and owns 1,089,101,358 shares which is equivalent to 29.48% of the outstanding capital stock of the latter per Secretary's Certificate issued by Pepsi-Cola dated October 2, 2008; that on September 30, 2008, the Board of Directors of Pepsi-Cola declared dividends in the amount of Three Hundred Sixty-Nine Million Three Hundred Seventy-Seven Thousand Two Hundred Twenty-Seven and 90/100 Pesos (PhP369,377,227.90) to stockholders of record as of October 15, 2008 and payable on or before November 7, 2008; 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 the Sworn Statement issued by Pepsi-Cola dated October 24, 2008. 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 received 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 . . ., 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." Thus, the provisions of Article 10 of the Philippines-Netherlands 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 one of the States to a resident of the other State may be taxed in that other State. cEaTHD 2. However, such dividends may also be taxed in the 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 recipient is a company the capital of which is wholly or partly divided into shares and 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. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and 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." Based on the aforequoted Article 10 insofar as the Philippines is concerned, the 10 percent preferential tax rate on dividends applies when the following conditions concur: (1) the payor and recipient of the dividends must be separately treated as a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of the Netherlands, (4) the recipient of the dividends is the beneficial owner thereof, (5) the capital of such recipient is wholly or partly divided into shares, and (6) the recipient holds directly at least 10 percent of the capital of the payor of the dividends. On the other hand, in applying the 15 percent preferential tax rate, less stringent conditions need concurrence, to wit: (1) the payor of the dividends must be a "company", (2) the payor of the dividends must be a resident of the Philippines, (3) the recipient of the dividends must be a resident of the Netherlands, and (4) the recipient of the dividends is the beneficial owner thereof. Article 3 (e) of the Philippines-Netherlands tax treaty defines the term "company" as "any body corporate or any other entity which is treated as a body corporate for tax purposes". SACEca For purposes of determining the residency of the payor and/or recipient of the dividends, Article 4 (1) of the same tax treaty provides: "Article 4 FISCAL DOMICILE 1. For the purposes of this Convention, the term 'resident of one of the States' means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature." Based on the representations made and the documents presented, it appears that all of the conditions in applying the 10 percent preferential tax rate are present. Firstly, Pepsi-Cola , the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Quaker Global, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, Pepsi-Cola is deemed a domestic corporation, while Quaker Global is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, Pepsi-Cola is a resident of the Philippines since it is treated as a juridical person under the laws of the Philippines, and is liable to taxation therein by reason of its being a domestic corporation. Thirdly, Quaker-Global , the recipient of the subject dividends, is a resident of the Netherlands for purposes of the Philippines-Netherlands tax treaty as declared by the tax authority of the Netherlands. Fourthly, Quaker Global is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated October 2, 2008. Fifthly, the capital of Quaker Global is wholly divided into shares, based on the Articles of Association of Quaker Global. Lastly, Quaker Global directly holds 29.48% of the total amount subscribed and paid-up shares of Pepsi-Cola , per Secretary's Certificate dated October 2, 2008 issued by the Corporate Secretary of Pepsi-Cola , or more than the required stockholdings of 10 percent. EADSIa Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends owns at least 10 percent of the capital of the paying company. In all other cases the 15 percent preferential tax rate applies. Such being the case and considering that Quaker Global holds more than 10 percent of the capital of Pepsi-Cola pertaining to Quaker Global shall be subject to the preferential tax rate of 10 percent, based on the gross amount of dividends, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD-008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009; BIR Ruling No. DA-ITAD-085-09 dated September 10, 2009) 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