ITAD BIR Ruling No. 076-10

December 14, 2010 ITAD BIR RULING NO. 076-10 Article 10 (2) (b), Philippines-Singapore tax treaty; BIR Ruling No. ITAD-31-99; BIR Ruling No. DA-ITAD-45-04; BIR Ruling No. DA-ITAD-23-04 Tam-Yap Caga & Associates Attorneys-at-Law Unit B, 15th Floor, ACT Tower 135 H.V. de la Costa Street, Salcedo Village Makati City Attention: Atty. Teresa R. Tam-Yap Atty. Maria Graciela B. Suratos Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on October 4, 2010, on behalf of your client, SKF Philippines, Inc. ("SKF-Phil") , requesting confirmation of your opinion that dividends paid by SKF-Phil to SKF Asia Pacific Pte. Ltd. ("SKF-Singapore") are subject to 25 percent preferential tax rate pursuant to Article 10 (2) (b) of 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 SKF-Singapore (formerly, SKF South East Asia and Pacific Pte. Ltd.) 1 is a corporation organized and existing under the laws of Singapore with principal address at 1 Changi South Lane, Singapore 486070, based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore on August 24, 2010; that SKF-Singapore is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission on May 20, 2010; and that, on the other hand, SKF-Phil is a corporation organized and existing under the laws of the Philippines, with principal address at Ground Floor, Alegria Building, 2229 Pasong Tamo Extension, Makati City, Philippines. It is further represented that on September 22, 2010, the Board of Directors of SKF-Phil approved a resolution to declare cash dividends in the amount of Php20,000,000.00, in favor of the stockholders of record of SKF-Phil as of December 31, 2009, and payable on October 15, 2010; that as of the date of payment of the dividends, SKF-Singapore holds 38 common shares of SKF-Phil, with a par value of Php10,000.00 each, or a total of Php380,000.00, which are equivalent to 0.88 percent of the total and outstanding shares of SKF-Phil; and that these shares are held by SKF-Singapore since July 31, 1989, and acquired through original subscription. HSDIaC It is finally represented that the issue or transaction subject of the 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 SKF-Phil on September 16, 2010. 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, which 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 that any income may be exempt to the extent required by any treaty obligation binding upon the Philippine government, thus: "Section 32. Gross Income . (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this particular case, you invoke the Philippines-Singapore tax treaty. Article 10 thereof provides: IaHDcT "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: 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. 3. 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 when the beneficial owner of the dividends owns at least 15 percent of the outstanding voting shares of the company paying the dividends during the part of the taxable year immediately preceding the date of payment of the dividends and during the whole taxable year prior to such payment. Otherwise, a tax rate of 25 percent applies. Accordingly, since SKF-Singapore holds only 0.88% of the total outstanding shares of SKF-Phil, such dividends received by SKF-Singapore from SKF-Phil shall be subject to a tax rate of 25 percent, pursuant to Article 10 (2) (b) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-031-99 dated October 7, 1999; BIR Ruling No. DA-ITAD-045-04 dated May 3, 2004; BIR Ruling No. DA-ITAD-023-04 dated March 9, 2004) 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 Footnotes 1. Based on the Certificate Confirming Incorporation of a Company under the New Name issued by the Accounting and Corporate Regulatory Authority of Singapore on February 4, 2008.