ITAD BIR Ruling No. 084-11

March 11, 2011 ITAD BIR RULING NO. 084-11 Article 10, Philippines-China tax treaty Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig City Attention: Maria Ana Camila C. Jacinto Gentlemen : This refers to your tax treaty relief application (TTRA) filed on December 28, 2010 requesting confirmation that the dividend payment by Ayala Land, Inc. ("ALI") to Best Investment Corporation ("BIC") is subject to the 15 percent preferential tax rate, pursuant to Article 10 (2) (b) of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-China tax treaty"). AHECcT It is represented that BIC, with address at Suite 936, No. 2 Building, No. 1 Complex, Nao Shi Kou Da Jie, Xicheng District, Beijing, People's Republic of China, is a resident of China per the Certificate of Chinese Fiscal Resident issued by Xicheng District Office in Beijing SAT dated June 11, 2010; that BIC is a one-person limited liability company duly organized and existing under the laws of the China, with registered capital of RMB10,000,000, based on the Articles of Association of BIC; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 6, 2010; and that, on the other hand, ALI is a corporation organized and existing under the laws of the Philippines with principal address at 31st Floor, Tower One & Exchange Plaza, Ayala Triangle Ayala Avenue, Makati City. It is further represented that at the meeting held on November 30, 2010, the Board of Directors of ALI unanimously approved Resolution No. B-37-10 declaring the payment from ALI's unappropriate retained earnings as of December 31, 2009 of a regular cash dividend of Php0.048 per common share corresponding to the second semester ending December 31, 2010, to all outstanding common shares of ALI as of December 14, 2010 and payable on January 11, 2011 per Secretary' Certificate dated December 15, 2010; that per certification of ALI dated December 15, 2010, the Hongkong and Shanghai Banking Corporation Limited-Manila Branch, custodian for BIC, has certified that BIC holds 72,259,500 common shares which constitutes 0.5548% of ALI outstanding shares. It is finally represented that, per Sworn Certification issued by ALI dated December 17, 2010, the 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 proceeding, or 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 income derived in the Philippines by a nonresident foreign corporation. It 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 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: CaDATc "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: 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." Thus, the provisions of Article 10 of the Philippines-China tax treaty, which you invoke, may apply to the instant case. It provides: "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 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 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 beneficial owner is a company 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. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of China at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent of the capital of the company paying the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof. In view of the foregoing, inasmuch as BIC holds only 0.5548% of the issued and outstanding capital stock of ALI, which is less than the required minimum shareholdings of 10 percent, the said dividends paid by ALI to BIC are subject to the 15 percent preferential tax rate prescribed under Article 10 (2) (b) of Philippines-China tax treaty. 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. HDAECI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue