ITAD BIR Ruling No. 083-11

March 11, 2011 ITAD BIR RULING NO. 083-11 Article 10, Philippines-Germany Tax Treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 559-88; BIR Ruling No. DA-ITAD-012-05; BIR Ruling No. DA-ITAD-181-03; BIR Ruling No. DA-ITAD-144-03; BIR Ruling No. DA-ITAD-171-02 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Jules E. Riego Principal, Tax Advocacy and Advisory Group Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on October 8, 2010, requesting that the dividend payments received by EVONIK STEAG GmbH ("EVONIK") from STEAG STATE POWER, INC. (STEAG) are subject to 10 percent preferential tax rate pursuant to Article 10 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty"). EaHDcS It is represented that EVONIK is a nonresident foreign corporation duly organized and existing under the laws of Germany, with principal office address at Ruttenscheider Strabe 1-3 Essen, Germany, and is subject to German taxation as evidenced by the Certificate of Residence dated September 14, 2010 issued by Finanzamt Tax Office of Germany; that EVONIK (formerly Steag Aktiengesellschaft) has a duly registered and licensed Philippine Regional Operating Headquarters in the Philippines with SEC No. A200400011 as shown in the Certificate of Corporate Filing/Information dated October 5, 2010 issued by the Securities and Exchange Commission of the Philippines; and that, STEAG, on the other hand, is a domestic corporation with principal address at 20th Floor, Yuchengco Tower, RCBC Plaza, Ayala Avenue, Makati City. It is further represented that on June 24, 2008, STEAG, under Resolution No. 2008-20-A, declared the distribution of cash dividends to its stockholders at US$.02195 per share (with notional Philippine currency equivalent on a per share basis to be determined at the exchange rate prevailing at the time of the distribution/payment of the dividends) subject to the following conditions: a) The Corporation has sufficient unappropriated retained earnings as determined by reference to the Corporation's unaudited financial statements as of May 31, 2008 and Projected Statements as of December 31, 2008 (the "2008 Dividend Statements"), copies of which shall be submitted to the Securities and Exchange Commission ("SEC") pursuant to its requirements; b) The conditions stipulated by the creditors of the Corporation before it may distribute dividends, including those set out in Section 8.3 of Section C of Schedule 4 to the Common Terms Agreement (constituting Part A of the Omnibus Agreement dated November 28, 2003 as amended and restated on October 11, 2005) are complied with; c) There is sufficient cash after all payments, transfers, provisions and reserves have been made in accordance with the Accounts Agreements as amended and restated on October 11, 2005; d) The dividends shall be paid to stockholders of record by the end of business on June 24, 2008 (Manila time) and shall be paid out within the period August 8, 2008 to August 29, 2008. If dividends have not been paid out by August 29, 2008 or within such extension period as may be allowed by the creditors, then the Corporation shall have no obligation to distribute and/or pay the dividends within the distribution period ending August 29, 2008 or such extension period as may be allowed by the creditors; ACTISD Prior to any such payment being made, each stockholder shall submit a written undertaking that it shall return to the Corporation, upon demand, all amounts received by it as dividends pursuant hereto in the event that the Corporation incurs a deficit at the end of the year, as described in item (e) below, or so much thereof as the Corporation determines to be its share in the extent of the deficit; e) As required by the SEC, in the event that the Corporation incurs a deficit at the end of the year, such dividends shall be recalled or refunded to the Corporation, and this liability shall attach to the share upon which dividends were declared and paid out regardless of change in ownership of the said shares; f) If the unappropriated retained earnings as the 2008 Dividend Statements, or the free cash after the payments, transfers, reserves have been made in accordance with the Accounts Agreement, be insufficient to cover the dividend declared hereunder, then the declared dividends shall be reduced accordingly and for this purpose, the Board designates Mr. Claus-Peter Bell, Mr. Erramon Aboitiz and Mr. Allen Roxas representing EVONIK, Aboitiz Power Corporation and State Investment Trust, Inc. respectively, acting unanimously to determine the specific amount of dividends to be declared and complying with the provisions of the finance agreements, applicable Philippine law and regulations and the remaining conditions stated in this Board resolution and such amount of reduced dividends shall for all intents and purposes be considered as the declared dividends pursuant to this resolutions. It is further represented that on August 14, 2008, the Board of Directors of STEAG declared the distribution of additional cash dividends to its stockholders at US$.01045 per share, hereafter referred to as the "Additional Dividends" (with notional Philippine currency equivalent on a per share basis to be determined at the exchange rate prevailing at the time of the distribution/payment of the dividends) subject to the aforecited conditions. It is further represented that the June 24, 2008 and August 14, 2008 declaration of dividends did not become legally due and demandable as of December 31, 2008 due to the absence of lender's approval as required in Resolution Nos. 2008-20-A and 2008-21-A under paragraph (b) thereof; that in order to improve the cash flow and take advantage of low local interest rates, in June, 2010, STEAG started the formal negotiation for the restructuring of its loan by borrowing from a local bank to finance the prepayment of its loans to its foreign or international creditors; that as a result of such loan restructuring, STEAG expected that it will be able to pre-pay its foreign creditors in full and ascertained the sufficiency of cash by the first week of October 2010, thus, effectively lifting all creditor-related loan and cash sufficiency restrictions on the said dividend declarations, making same legally due and demandable as of such date with respect to STEAG's existing shareholders as of June 24, 2008 and August 14, 2008; that as of June 24, 2008 and August 14, 2008, EVONIK owns 176,410,931 common shares amounting to P1,764,109,310.00 and 84,150,000 in the amount of P841,500,000 having a total par value amounting to P2,605,609,310 which constitutes 55% of the total outstanding capital stock of STEAG; and that as of the date of payment of dividends, EVONIK owns 157,461,045 common shares and 84,150,000 with the total par value of P2,416,110,450.00 which is 51% of the outstanding capital stock of STEAG. It is finally represented that the issue or transaction subject of the above application 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. 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 dividend payments received by nonresident foreign corporation. It provides: DCISAE "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 interests, 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that such income may be exempt from income tax (or partially exempt if subject to reduced rate only) to the extent required by any treaty obligation on the Philippines, viz. : "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, the treaty involved is the Philippines-Germany tax treaty which, in its Article 10 provides as follows: "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 the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends. xxx xxx xxx 4. The term "dividends" as used in this Article 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 company making the distribution is a resident, and income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. xxx xxx xxx" Based on the foregoing, dividends paid by a Philippine corporation to a resident of Germany may be taxed at a rate not exceeding 10 percent of the gross amount of dividends provided that the recipient is a company and that it holds directly at least 25 percent of the capital of the Philippine corporation. In all other cases, a 15 percent preferential tax rate applies. THaDEA In the instant case, EVONIK holds more than 25 percent of the outstanding capital stock of STEAG, therefore, the cash dividends paid by STEAG to EVONIK shall be subject to the 10 percent preferential tax rate on the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Germany tax treaty. (BIR Ruling No. 559-88 dated November 24, 1988; BIR Ruling No. DA-ITAD-012-05 dated February 16, 2005; BIR Ruling No. DA-ITAD-181-03 dated November 25, 2003; BIR Ruling No. DA-ITAD-144-03 dated September 25, 2003; BIR Ruling No. DA-ITAD-171-02 dated October 2, 2002) 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