ITAD BIR Ruling No. 078-10

December 14, 2010 ITAD BIR RULING NO. 078-10 Article 11, Philippines-US Tax Treaty; BIR Ruling No. 123-84; BIR Ruling No. ITAD-127-04 The Philippine American Life and General Insurance Company Philamlife Tower, 8767 Paseo De Roxas Makati City Attention: Ma. Fe R. Velasco SVP & Controller-Finance Department Gentlemen : This refers to your letter dated August 3, 2009 requesting confirmation that the intended dividend distribution of The Philippine American Life and General Insurance Company (hereinafter referred to as "Philam" ) to American Life Insurance Company (hereinafter referred to as "ALICO") is subject to 20 percent final withholding tax, pursuant to Article 11 of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (hereinafter referred to as "Philippines-US tax treaty" ). It is represented that ALICO, with address at 600 King Street, Wilmington, Delaware 19801, United States of America, is a nonresident foreign corporation duly organized and existing under the laws of the Delaware, United States of America, with TIN: 98-0000065, as evidenced by a certification issued by the Internal Revenue Service, Philadelphia, PA dated April 13, 2009; that it is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on dated June 5, 2009; and that Philam is a corporation duly organized and existing under the laws of the Philippines, with business address at the 23rd Floor Philamlife Tower, 8767 Paseo de Roxas, 1226 Makati City. It is further represented that during the special meeting of the Board of Directors of Philam held on March 13, 2009, the Board of Directors, per Resolution No. 08-PAL-BD-2009, approved and declared cash dividends in the amount of Six Pesos (P6.00) per share, or a total amount of One Billion Two Hundred Million Pesos (P1,200,000,000.00) Philippine Currency for its Two Hundred Million common shares (200,000,000), payable to all shareholders of Philam in proportion to the shareholdings as of March 12, 2009, payable immediately, provided, however, that the accrual and payment of cash dividends to the foreign shareholders shall take effect on the date the governmental authorities approved their remittance; that per Sworn Certificate issued by the Corporate Secretary of Philam on December 7, 2009, the Insurance Commission approved the cash dividend declaration on June 22, 2009; that the exact date of remittance was July 28, 2009; that as of April 23, 2008, ALICO owns 172,120,949 (including 9 nominal shares) shares of Philam with par value of P10.00 per share and its percentage of ownership is 99.78%, per Secretary's Certificate issued by Philam dated August 7, 2009; and that per sworn certification issued by the Senior Vice-President for Finance and Controller of Philam dated November 3, 2009, the issue or transaction subject of the above 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 a judicial appeal of the taxpayer/s involved. DHITSc In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended by Republic Act No. 9337, provides as follows: "SEC. 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%)." However, Section 32 (B) (5) of the same Code provides as follows, to wit: "SEC. 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 ( i.e. , TITLE II-TAX ON INCOME): 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. " IaDcTC In this particular case, the treaty involved is the Philippines-US tax treaty which, in its Article 11, provides as follows: "Article 11 DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed a) 25 percent of the gross amount of the dividend; or b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation'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 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. 3. Dividends paid by a corporation of one of the Contracting States to a person other than a citizen or resident of the other Contracting State may be taxed by the other Contracting State, but only if a) Such dividends are treated as income from sources within that other Contracting State and, in the case of the Philippines, the additional tax described in paragraph 6 has not been paid with respect to the earnings distributed, or IEHSDA b) The recipient of the dividends has a permanent establishment or fixed base in the other Contracting State and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. 4. Paragraph 2 shall not apply if the recipient of dividends derived from 15 (Independent Personal Services), as the case may be, shall apply. 5. The term "dividends" as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident." Based on the aforequoted Article, the 20 percent preferential tax rate on dividends shall apply if the beneficial owner is a company which holds directly at least 10 percent either of the voting shares of the company or of the total shares issued by company paying the dividends during six months immediately preceding the date of payment and 25 percent in all other cases. Based on the above provisions, the dividend payments by Philam to ALICO shall be subject to withholding tax at the rate of 20 percent of the gross amount of dividends considering that ALICO owns 99.78% of the total outstanding stocks of Philam, as of April 23, 2008, which is during the period of six months immediately preceding the date of payments of the dividends on July 28, 2009. HcISTE 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