ITAD BIR Ruling No. 078-15

March 25, 2015 ITAD BIR RULING NO. 078-15 Article 11, Philippines-Thailand Tax Treaty SCG Trading Philippines, Inc. Unit 0903, 9th Floor, Fort Legend Tower Lot 3, Block 7, 3rd Avenue corner 31st Street Fort Bonifacio, Taguig City Attention: Saran Wongratana President Gentlemen : This refers to your tax treaty relief application filed on October 29, 2012, on behalf of SCG TRADING CO. LTD. ("SCG Thailand") , requesting confirmation that dividends paid by SCG TRADING PHILIPPINES, INC. ("SCG Phil") to SCG Thailand are subject to the 15 percent preferential tax rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Thailand tax treaty"). It is represented that SCG Thailand, with address at 1 Siam Cement Road, Khwaeng Bangsue, Khet Bangsue, Bangkok 10800, Thailand, is a corporation organized and existing under the laws of Thailand for tax purposes and is a resident of Thailand per Certificate of Residence issued by the Director of Bureau of Large Business Tax Administration on September 25, 2012; that SCG Thailand is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 6, 2012; that SGS Thailand is the leading global trading company in the areas of energy, recycling, construction material and industrial supplies; that it covers the categories of cement product, board product, insulation, roofing, steel, home improvement product, energy product, plastic & chemicals, aluminum, machineries & minerals, agro-industry, waste paper, steel scrap, paper & pulp, non-ferrous & plastic scrap, and food & beverages; that SGS Phil, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address at Unit 902, Forth Legend Tower, Lot 3, Block 7, 3rd Avenue corner 31st Street, Taguig City. It is also represented, per Secretary's Certificate dated December 21, 2012, that on December 20, 2012 at the meeting of the Board of Directors of SGS Phil, the Board approved the declaration of a cash dividends to all its stockholders of record as of December 20, 2012 amounting to Twenty-Seven Million Pesos (Php27,000,000,000.00) n SGS Phil; that as of December 20, 2012, SCG Thailand owns 112,315 shares amounting to Php11,231,500.00, representing 99.99% ownership in SGS Phil; that these shares were acquired by SCG Thailand through direct equity subscription upon incorporation of SGS Phil; and that the said dividends were paid out to SCG Thailand on December 20, 2012 through Standard Chartered Bank-Ayala Branch as evidenced by a Sworn Certification issued by SCG Phil dated January 15, 2013. Finally, it is represented that the transaction subject of the herein 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 taxpayers involved per the Sworn Statement issued by PHI dated October 2, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: EaCDAT "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, rents, royalties . . .: 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 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" Thus, Article 10 of the Philippines-Thailand tax treaty which you invoked may apply to the instant case. It provides: "Article 11 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 also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient of the dividends is a company which holds directly at least 15 per cent of voting shares of the company paying the dividends, the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the company paying the dividends is a Philippine company or if the company paying the dividends is a Thai company engaged in an industrial undertaking; b) 20 per cent of the gross amount of the dividends if the company paying the dividends is a Thai company not engaged in an industrial undertaking. 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. 4. a) 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. xxx xxx xxx 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 15, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing provisions, dividends arising in the Philippines and paid by a Philippine company to a resident of Thailand may be subject to income tax in the Philippines at the rate of 15 percent if the recipient of the dividends is a company which holds directly at least 15 percent of the voting shares of the company paying the dividends. The rate of the tax that may be imposed thereon shall not exceed 20 percent of the gross amount of dividends if the company paying the dividends is a Thai company not engaged in an industrial undertaking. ETHSAI Such being the case, considering that the payor of dividends, SCG Phil, is a Philippine company, and since SCG Thailand is a resident company of Thailand which does not have a fixed place of business in the Philippines, and which holds directly 99.99 percent of the outstanding capital stock of SCG Phil (which in fact exceeds the minimum required holding percentage of 15 percent), this Office is of the opinion and so hold that such dividends paid by SCG Phil to SCG Thailand are subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 11 of the Philippines-Thailand 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