ITAD BIR Ruling No. 086-11

March 11, 2011 ITAD BIR RULING NO. 086-11 Article 10, Philippines-Switzerland tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. ITAD 53-10; BIR Ruling No. ITAD 42-10; BIR Ruling No. ITAD 9-10; BIR Ruling No. ITAD 2-10 Manabat Delgado Amper & Co. 5th Floor Salamin Building 197 Salcedo Street, Legaspi Village Makati City 1229 Attention: Richard R. Lapres Representative Gentlemen : This refers to your Tax Treaty Relief Application filed on December 9, 2010, on behalf of your client, UBS INVESTMENTS PHILIPPINES, INC. ("UBS-Phil.") , requesting confirmation that the dividends to be paid by UBS-Phil. to UBS AG are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty"). cTSHaE It is represented that UBS AG is a nonresident foreign corporation organized and existing under the laws of Switzerland and is a resident of Switzerland within the meaning of the Philippines-Switzerland tax treaty, with office addresses at Bahnhofstrasse 45, 8001 Zurich per Certificate of Residence issued by the Tax Administration of the Canton of Zurich dated April 22, 2010; that UBS AG's main line of business is the operation of a bank, extending to all types of banking, financial, advisory, trading and service activities in Switzerland and abroad; that UBS AG has a representative office in the Philippines, registered under the Securities and Exchange Commission ("SEC") with SEC Registration No. A200300081 evidenced by the Certification of Non-Registration of Company issued by the SEC dated November 15, 2010; and that, on the other hand, UBS-Phil. is a domestic corporation organized to exercise all powers and functions allowed for Investment Houses under Philippine laws, with office address at 19th Floor Tower 1 and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. It is also represented that UBS AG has 3,550,000 preferred non-voting shares and 2,999,996 common and voting shares in UBS-Phil.; that the aforementioned shares represent 99.44% of the outstanding capital stock of UBS-Phil. per Secretary's Certificate dated January 17, 2011; that at the organizational meeting of the Board of Directors of UBS-Phil. held on June 25, 2010, it was resolved that a cash dividend amounting to Six Hundred Seventy-Two Thousand Six Hundred Ninety-Nine Pesos and Forty-Seven Centavos (Php672,699.47) out of the unrestricted retained earnings for the year 2008, and Twenty-Two Million One Hundred Forty-Three Thousand Six Hundred One Pesos (Php22,143,601.00) from the unrestricted retained earnings for the year 2009, be distributed to all preferred stockholders of record of UBS-Phil. as of June 30, 2010, payable on or before December 31, 2010. It is further represented that the dividends to be paid to UBS AG are not in any way connected to the operations of UBS AG's Philippine representative office per Sworn Statement of the resident agent of UBS AG's Philippine representative office dated December 13, 2010; and that, per Sworn Statement of UBS-Phil. dated November 18, 2010, the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, 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 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 . . ., dividends, . . .: 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" In this particular case, the treaty involved is the Philippines-Switzerland tax treaty. Its Article 10 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 (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 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 taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Switzerland at a rate not exceeding 10 percent of the gross amount of the dividends if the latter holds directly at least 10 percent of the capital of the first-mentioned company. In all other cases, the 15 percent preferential tax rate shall apply. In view of the foregoing, since UBS AG owns 99.44% of the outstanding capital stock of UBS-Phil., the paying corporation, this Office is of the opinion and so holds that the cash dividends to be remitted by UBS-Phil. to UBS AG are subject to the preferential rate of 10 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD 53-10 dated October 18, 2010; BIR Ruling No. ITAD 42-10 dated September 23, 2010; BIR Ruling No. ITAD 9-10 dated June 3, 2010; BIR Ruling No. ITAD 2-09 dated January 14, 2009) 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. IHSTDE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue