ITAD BIR Ruling No. 087-11

March 11, 2011 ITAD BIR RULING NO. 087-11 Article 10, Philippines-Singapore 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 76-10; BIR Ruling No. ITAD 61-10; BIR Ruling No. ITAD 52-10; BIR Ruling No. ITAD 49-10; BIR Ruling No. ITAD 31-99 Cochingyan & Peralta Law Offices 12th Floor, 139 Corporate Center, 139 Valero Street, Salcedo Village Makati City Attention: Jose Cochingyan III Gentlemen : This refers to your Tax Treaty Relief Application filed on December 30, 2010, on behalf of your client, EBI ASIA PACIFIC PTE. LTD. ("EBI Singapore"), requesting confirmation that the dividends to be paid to EB Asia by EAGLEBURGMANN PHILIPPINES, INC. ("EBI Philippines") 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 Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty"). cACDaH It is represented that EBI Singapore is a nonresident foreign corporation organized and existing under the laws of Singapore with registered office address 1 Marina Boulevard, #28-00, Singapore per Certificate of Residence issued by the Inland Revenue Authority of Singapore dated November 25, 2011; that EBI Singapore is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated December 10, 2010; and that, on the other hand, EBI Philippines is a domestic corporation engaged in the manufacture and trade of goods such as mechanical seals, diaphragm couplings, packings, gaskets and expansion joints, with office address at 9769 National Road, Maduya, Carmona, Cavite. It is also represented that from March 5, 2008 until November 17, 2010, EBI Singapore is the principal stockholder of EBI Philippines, holding 216,746 paid-up shares which represent 90.31% of the outstanding capital stock of EBI Philippines per Secretary's Certificate dated November 19, 2010; that at the meeting of the Board of Directors of EBI-Philippines held on November 17, 2010, it was resolved that a cash dividend amounting to One Hundred Forty-One Pesos and Seventy-Five Centavos (Php141.75) per share, in the total amount of Thirty-Four Million Twenty Thousand Pesos (Php34,020,000.00), be declared in favor of all stockholders of record as of November 17, 2010; that the aforementioned dividends were paid on December 17, 2010; and that, per Sworn Statement of EBI Philippines dated January 14, 2011, the transaction subject of the application for tax treaty relief is 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%). AEHCDa 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-Singapore tax treaty, which, in 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 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 if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company'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 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 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. 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. AEIcSa 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 14, as the case may be, shall apply. 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 Singapore at a rate not exceeding 15 percent of the gross amount dividends if the latter holds during the part of the Philippine company's taxable year which precedes the date of payment of the dividend and during the whole of the Philippine company's taxable year, if any, at least 15 percent of the outstanding shares of voting stock of the Philippine company. In all other cases, the 25 percent preferential tax rate shall apply. In view of the foregoing, since EBI Singapore owns 90.31% of the outstanding and voting shares of EBI Philippines, the paying corporation, during the part of EBI Philippine's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, this Office is of the opinion and so holds that the cash dividends to be paid by EBI Philippines to EBI Singapore are subject to the preferential rate of 15 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD 76-10 dated December 14, 2010; BIR Ruling No. ITAD 61-10 dated November 3, 2010; BIR Ruling No. ITAD 52-10 dated October 18, 2010; BIR Ruling No. ITAD 49-10 dated October 8, 2010; BIR Ruling No. ITAD 31-99 dated October 7, 1999) 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