ITAD BIR Ruling No. 068-16

April 5, 2016 ITAD BIR RULING NO. 068-16 Article 10, Philippines-Singapore tax treaty Star Cruises Hong Kong Management Services Philippines, Inc. Star Cruises Centre 100 Andrews Ave. Newport City Pasay 1309 Attention: Mr. Armando De Asa Representative Gentlemen : This refers to your application for tax treaty relief dated June 25, 2014, requesting confirmation of your opinion that the dividends paid by Star Cruises Hong Kong Management Services Philippines, Inc. ("Star Cruises") to Starlet Investment Pte. Ltd. ("Starlet") are subject to the preferential tax rate of 15 percent pursuant with the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty"). It is represented that Starlet is a foreign corporation organized and existing under the laws of Singapore; that it is a resident of Singapore for tax purposes based on the Certification issued by the tax authority of Singapore. It is not registered as a partnership or a corporation based on the Certification issued by the Securities and Exchange Commission on May 29, 2014. On the other hand, Star Cruises is a domestic corporation, organized and existing under Philippine laws. It is further represented that Starlet is the registered owner of One Thousand Nine Hundred Ninety Eight (1,998) shares of stocks and a beneficial owner of Two (2) shares of stocks, representing a total of 40% of the capital stocks of Star Cruises since 07 April 2011; and that during a meeting of the Board of Directors of Star Cruises held on March 13, 2014, it declared cash dividends in the amount of Four Hundred Fifty One Million Three Hundred Twenty Six Thousand and One Hundred Eighty Six Pesos (P451,326,186.00) in favor of its stockholders of record as of June 15, 2014 based on their respective shareholding to be paid on or before June 30, 2014. It is finally represented that the dividends subject of this ruling 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 sworn Certificate of No Pending Case executed by its representative on June 9, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to Starlet are subject to income tax at the rate 30 percent, thus: "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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that 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: "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 the Philippines-Singapore tax treaty, as amended. Paragraphs 1, 2 and 3, Article 10 thereof provide: " Article 10 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: 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. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx" (underscoring supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines, at a rate not to exceed: (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 (b) and in all other cases, 25 percent. TIADCc This being the case, and considering that Starlet holds 40 percent of the total shares of Star Cruises during the part of its taxable year preceding the designated payment of dividends in the year 2014, and during the whole of Star Cruises ' prior taxable year, in fact since 07 April 2011, this Office is of the opinion and so holds that such dividends paid by Star Cruises to Starlet are subject to income tax at a preferential rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Singapore 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue