ITAD BIR Ruling No. 068-10

December 3, 2010 ITAD BIR RULING NO. 068-10 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 Cohingyan & Peralta Law Offices Twelfth Floor, 139 Corporate Center 139 Valero Street, Salcedo Village Makati City 1227 Attention: Jose Cochingyan III Managing Partner Gentlemen : This refers to your letter dated December 16, 2008, on behalf of your client EBI Asia Pacific Pte., Ltd. (EBI-Singapore), requesting application of the preferential tax rate of 15 percent of the gross amount of the dividends which EBI-Singapore will receive from EagleBurgmann Philippines, Inc. (EBI-Philippines), pursuant to the Philippines-Singapore tax treaty. It is represented that EBI-Singapore is a corporation organized and existing under the laws of Singapore with principal address at 29 International Business Park, Acer Building Tower B, #03-03, Singapore 609923 based on the Certificate of Residence issued by Mrs. Sabina H B Cheong, Assistant Commissioner of the Corporate Tax Division of the Inland Revenue Authority of Singapore dated November 24, 2008; 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 December 16, 2008; that, on the other hand, EBI-Philippines is a corporation organized and existing under the laws of the Philippines with principal address at 9769 National Road, Maduya, Carmona, Cavite; that per Sworn Certification issued by EBI-Philippines dated August 18, 2009, EBI-Philippines was incorporated and primarily engaged in the business of manufacturing goods such as mechanical seals, diaphragm couplings packaging, gasket and expansion joints, and to trade the same on wholesale/retail basis based on its Amended Articles of Incorporation certified by the Securities and Exchange Commission on October 20, 2008. CTHDcS It is further represented that since March 5, 2008 until December 4, 2008, EBI-Singapore is the principal stockholder of EBI-Philippines holding 216,750 paid-up shares out of the 240,000 total issued outstanding capital stock, with a total par value of Twenty-One Million Six Hundred Seventy-Five Thousand (PhP21,675,000.00) which represents 90.31% of the outstanding shares of stock of EBI-Philippines; that in a meeting held on December 4, 2008, the Board of Directors of EBI-Philippines declared cash dividends from the surplus retained earnings of EBI-Philippines accumulated as of fiscal year ending December 31, 2007 at P80.00 per share in an amount of Nineteen Million Three Hundred Ninety-Two Thousand Pesos (PhP19,392,000.00) to the stockholders of record as of December 4, 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 Sworn Statement issued by EBI-Philippines dated December 17, 2008. 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%)." CTEDSI 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 invoke Article 10 of the Philippines-Singapore tax treaty, which 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: HASTCa (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 (4) 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 EBI-Singapore holds 90.31% of the total outstanding shares of stock of EBI-Philippines 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 EBI-Singapore 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) CAaDSI 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