ITAD BIR Ruling No. 069-10

December 3, 2010 ITAD BIR RULING NO. 069-10 Article 10 of the Philippines-Netherlands Tax Treaty; BIR Ruling No. DA-ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Luis Jose P. Ferrer Partner, Tax Advisory and Advocacy Group Gentlemen : This refers to your letter dated July 13, 2009, on behalf of your client, Roche (Philippines), Inc. ("RPI") , requesting confirmation of your opinion that the cash dividend payments to be made by RPI to its parent company, Roche Pharmholding BV ("Roche BV") are subject to 10 percent preferential final withholding tax rate under Article 10 (2) (a) of the Philippines-Netherlands tax treaty. It is represented that Roche BV is a corporation organized and existing under the laws of The Netherlands, with principal address at Beneluxlaan 2 A, 3446 GR Woerden, The Netherlands as evidenced by the Declaration of Residence signed on behalf of the inspector of the Tax Administration Utrecht-Gooi/Kantoor Utrecht, The Netherlands, Ms. Ingrid Van Marum dated November 5, 2009; 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 May 20, 2009; that RPI is a corporation organized and existing under the laws of the Philippines with principal address at 2252 Don Chino Roces Avenue, 1231 Makati City. It is further represented that Roche BV holds 100% of the outstanding capital stock of RPI; that on April 24, 2009 the Board of Directors of RPI declared a cash dividend amounting to Four Hundred Million Pesos (PhP400,000,000.00) to all stockholders of record as of April 24, 2009, out of the 2008 unrestricted retained earnings, payable in installments, provided, however, that a portion thereof shall be set-off and applied as payment of any outstanding subscription price payable by such stockholders; that the Board of Directors of RPI likewise declared stock dividends amounting to One Hundred Million Pesos (PhP100,000,000.00) to all stockholders of record as of April 24, 2009, out of the 2008 unrestricted retained earnings, payable as soon as possible; 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 certification issued by RPI dated July 13, 2009. DASCIc 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 income 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 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%)." 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. CcAITa xxx xxx xxx" In this particular case, you invoked the provision of Article 10 of the Philippines-Netherlands tax treaty, 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. 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. cHAIES xxx xxx xxx" 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" . 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." HCTAEc 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, RPI, the payor of the subject dividends, is a "company" since it is treated as a body corporate for tax purposes. Roche BV, the recipient of the dividends, is also a "company" because it is treated in the same manner. Specifically, RPI is deemed a domestic corporation, while Roche BV is deemed a nonresident foreign corporation, for purposes of the income tax law of the Philippines. Secondly, RPI 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 it being a domestic corporation. Thirdly, Roche BV, 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, Roche BV is the beneficial owner of the subject dividends, based on the Secretary's Certificate dated July 9, 2009. Fifthly, the capital of Roche BV is wholly divided into shares, based on the Articles of Incorporation of Roche BV. Lastly, Roche BV directly holds 100% of the total amount subscribed and paid up shares of RPI, per Secretary's Certificate dated July 9, 2009 issued by the Corporate Secretary of RPI, or more than the required stockholdings of 10 percent. ECaSIT 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 Roche BV holds 100% of the capital of RPI, this Office is of the opinion and so holds that the dividend payments by RPI to Roche BV shall be subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 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 foregoing 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