ITAD BIR Ruling No. 084-12

February 16, 2012 ITAD BIR RULING NO. 084-12 Article 11, Philippines-US Tax Treaty; BIR Ruling No. ITAD 058-84 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms. Eleanor L. Roque Head, Tax Advisory & Compliance Gentlemen : This refers to your tax treaty relief application filed on July 26, 2010, on behalf of Oakmark International Small Cap Fund ("Oakmark") , requesting confirmation that the dividend payments made by Alaska Milk Corporation ("Alaska") to Oakmark are subject to 25 percent preferential tax rate pursuant to 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. ("Philippines-US tax treaty"). It is represented that Oakmark, with address at 2 North La Salle Street, Suite 500, Chicago, Illinois 60602, United States of America (US), is a resident of the US for purposes of taxation based on the Certificate of Residency issued by the Internal Revenue Service dated May 17, 2010; that Oakmark is not registered 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 July 22, 2010; and that, on the other hand, Alaska is a domestic corporation duly organized and existing under Philippine laws located at the 6th Floor, Corinthian Plaza Building, 121 Paseo de Roxas, Makati City. It is also represented that at a meeting held on May 4, 2010, the Board of Directors of Alaska has approved the declaration of cash dividends of Php0.50 per share, composed of a regular cash dividend of Php0.05 per share, payable on June 30, 2010 to all stockholders of record as of June 4, 2010, and a special dividend of Php0.45 per share, payable as follows: aTADCE a. Php0.75 per share on June 30, 2010 to all stockholders of record as of June 4, 2010; b. Php0.125 per share on September 30, 2010 to all stockholders of record as of September 6, 2010; c. Php0.125 per share on December 29, 2010 to all stockholders of record as of December 3, 2010; and d. Php0.125 per share on March 30, 2011 to all stockholder of record as of March 4, 2011. It is further represented, as certified by the Standard Chartered Bank Securities Services Department, as the custodian of various nonresident foreign clients, that as of March 5, 2010, Oakmark , a beneficial holder of Alaska shares of stock, holds 56,360,000 shares valued at Php456,516,000.00 constituting 5.81849790% ownership in Alaska per the Secretary's Certificate issued by Alaska dated February 8, 2011. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on November 26, 2010, that the 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 of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code) , as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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%). AECIaD xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt or partially exempt from income tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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" With respect to a treaty, what you invoke for this purpose is the Philippines-US tax treaty. Its Article 11 provides: "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. CaTcSA xxx xxx xxx 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. xxx xxx xxx" Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the US may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 25 percent of the gross amount of dividends; and (b) 20 percent if the corporation holds directly at least 10 percent of the outstanding shares of the voting stock of capital of the company paying the dividends. Relative thereto, please be informed that under Section III (2) of Revenue Memorandum Order No. 1-00 (Procedures for Processing Tax Treaty Relief Application) ("RMO 1-2000") , any availment of tax treaty relief (exemption from income tax or reduction of tax) shall be preceded by an application filed at the International Tax Affairs Division ("ITAD") of this Bureau at least 15 days before the intended transaction or payment of income, thus: "III. Policies: In order to achieve the above-mentioned objectives, the following policies shall be observed: xxx xxx xxx 2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No. 0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the transaction i.e. , payment of dividends, royalties, etc., accompanied by supporting documents justifying the relief. . ." (Emphasis ours) This condition was emphasized by the Court of Tax Appeals in Mirant (Philippines) Operations Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 6382 dated June 7, 2005) where it ruled: "However, it must be remembered that a foreign corporation wishing to avail of the benefits of the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions of the tax treaty applies to it, before the benefits may be extended to such corporation. In other words, a resident or non-resident foreign corporation shall be taxed according to the provisions of the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said corporation, and that, in cases the same are applicable, the option to avail of the tax benefits under the tax treaty has been successfully invoked. Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided that the availment of a tax treaty provision must be preceded by an application for a tax treaty relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to. The implementation of the said Revenue Memorandum Order is in harmony with the objectives of the contracting state to ensure that the granting of the benefits under the tax treaties are enjoyed by the persons or corporations duly entitled to the same. The Court notes that nowhere in the records of the case was it shown that petitioner indeed took the liberty of properly observing the provisions of the said order. Petitioner quotes various BIR, as well as ITAD, Rulings issued to several foreign corporations seeking for a tax relief from the office of the respondent. However, not any one of these rulings pertains to the petitioner. It must be stressed that BIR rulings are issued based on the facts and circumstances surrounding particular issue/issues in question and are resolved on a case-to-case basis. It would be thus erroneous to invoke the ruling of the respondent in specific cases, which have no bearing to the case of petitioner." (Emphasis ours) This decision was also upheld by the Supreme Court in a Resolution (G.R. No. 168531) dated February 18, 2008. Furthermore, the necessary requirement laid down in RMO 1-2000 is reiterated in subsequent rulings of the Court of Tax Appeals: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue (C.T.A. Case No. EB 456 dated May 29, 2009), CBK Power Company Ltd. vs. Commissioner of Internal Revenue (C.T.A. Case Nos. 6699, 6844 and 7166 dated March 29, 2010) and Manila North Tollways Corporation vs. Commissioner of Internal Revenue (C.T.A. Case No. 7864 dated April 12, 2011). EDACSa In view of the foregoing, since there were dividends paid to Oakmark on June 30, 2010 , and the subject TTRA was only filed on July 26, 2010 in violation of Section III (2) of RMO 1-2000, this Office hereby DENIES the TTRA for having been filed beyond the 15-day period prescribed by the RMO. Accordingly, the subject dividends shall be subject to income tax at the rate of 30 percent as provided under Section 28 (B) (1) of the 1997 National Internal Revenue Code, as amended. However, since Oakmark holds less than 10 percent of the outstanding shares in Alaska , the dividends paid on September 30, 2010 , December 29, 2010 and March 30, 2011 are hereby GRANTED relief and the said dividends are subject to the preferential tax rate of 25 percent of the gross amount of the dividends pursuant to Article 11 (2) (a) of the Philippines US tax treaty. (BIR Ruling No. 058-84 dated March 9, 1984) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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