ITAD BIR Ruling No. 088-11

March 14, 2011 ITAD BIR RULING NO. 088-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. DA-ITAD-008-09; BIR Ruling No. DA-ITAD-040-09; BIR Ruling No. DA-ITAD-085-09 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Managing Partner, Tax Gentlemen : This refers to your tax treaty relief application filed on June 11, 2010, on behalf of your client, ICT Marketing Services, Inc. ("ICT-Philippines") [now Sykes Marketing Services, Inc. ], 1 requesting confirmation that the cash dividends paid by ICT-MSI to ICT-Group Netherlands B.V. ("ICT-Netherlands") , are subject to 10 percent preferential final withholding tax rate pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . ASICDH It is represented that ICT-Netherlands with address at Prins Bernhardplein 200, 1097 JB Amsterdam, The Netherlands, is a resident of the Netherlands, per the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands on December 1, 2009; that it is a corporation organized and existing under the laws of the Netherlands with an authorized capital of Ninety Thousand Euro (EUR90,000), divided into nine hundred (900) shares of one hundred euro (EUR100) each; that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 11, 2010; and that, on the other hand, ICT-Philippines is a corporation organized and existing under the laws of the Philippines with principal address at 9th Floor, PBCOM Tower, 6795 Ayala Avenue, Makati City. It is further represented that per Secretary's Certificate issued by ICT-Philippines dated May 27, 2010, ICT-Netherlands holds 577,595 shares in ICT-Philippines with a par value of PhP57,759,500.00 and which represents 99.99% of the shareholdings of ICT-Philippines; that at a special meeting of the Board of Directors of ICT-Philippines called with proper notice and held through a telephone conference on April 19, 2010, a resolution was unanimously approved and adopted to declare the issuance of cash dividends in the amount of US$25,000,000.00 in favor of its stockholders of record as of March 31, 2010, in proportion to their respective shareholdings, effective on April 26, 2010; that the issue or 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 per certification issued by ICT-Philippines dated May 21, 2010. 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%)." aEcSIH However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "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: (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-Netherlands 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 one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the 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 recipient is a company the capital of which is wholly or partly divided into shares and 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. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident." Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. ATESCc Accordingly, inasmuch as ICT-Netherlands is a private company in the Netherlands, the capital of which is wholly divided into shares and since ICT-Netherlands holds directly 99.99 percent of the capital of ICT-Philippines (which is actually more than the required minimum of shareholding of 10 percent), such dividends to be paid by ICT-Philippines to ICT-Netherlands are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. DA-ITAD-008-09 dated January 27, 2009; BIR Ruling No. DA-ITAD-040-09 dated March 25, 2009; BIR Ruling No. DA-ITAD-085-09 dated September 10, 2009) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Per Certificate of Filing of Amended Articles of Incorporation issued by the Securities and Exchange Commission dated May 31, 2010.