ITAD BIR Ruling No. 090-11

March 14, 2011 ITAD BIR RULING NO. 090-11 Article 11, Philippines-United States of America tax treaty; BIR Ruling No. 058-84; BIR Ruling No. 056-98; BIR Ruling No. ITAD-031-99; BIR Ruling No. ITAD-172-03; BIR Ruling No. 077-02 Connell Bros. Co. Pilipinas, Inc. 3/F Prudentialife Building 31 EDSA Mandaluyong 1550 Metro Manila, Philippines Attention: Ms. Teresita C. Flores Representative Gentlemen : This refers to your letter dated July 22, 2009, applying for relief from double taxation on the cash dividends declared by Connell Bros. Company Pilipinas, Inc. (Connell-Phil) in favor of its stockholder Wilbur-Ellis Company (WECO) pursuant to Article 11 (2) (a) of 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-United States of America tax treaty") . AHCaED It is represented that WECO is a corporation organized and existing under the laws of the United States of America with principal address at 345 California Street, 27th Floor, San Francisco, CA 94104 per the duly authenticated copy of Restated Articles of Incorporation of WECO; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated May 11, 2009; that Connell-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 3rd Floor, Prudentialife Building, No. 31 E. delos Santos Avenue, Mandaluyong City. It is further represented that WECO holds 99.99% or a total of 133,495 shares with Connell-Phil per Corporate Secretary's certification dated May 6, 2009; that in a special meeting of the Board of Directors of Connell-Phil held on March 23, 2009, it was unanimously approved that a cash dividend of PhP732.00 per share in the total amount of PhP97.722 Million be declared out of the unrestricted retained earnings of Connell-Phil as of December 31, 2008 in favor of all the stockholders of record of Connell-Phil as of May 12, 2009, and payable by May 15, 2009; that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per sworn certification issued by Connell-Phil dated July 21, 2009. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, applies in general to dividends received 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: "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: DaHcAS (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this particular case, you invoked Article 11 of the Philippines-United States of America tax treaty. It 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. 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." Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident of the United States of America at a rate not exceeding 20 percent of the gross amount of the dividends 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; or 25 percent, in all other cases. ECaHSI In view thereof and considering that WECO holds 99.99% shareholdings with Connell-Phil, the dividend paid by Connell-Phil to WECO is subject to the preferential tax rate of 25 percent, pursuant to the Philippines-United States of America tax treaty. (BIR Ruling No. 058-84 dated March 9, 1984; BIR Ruling No. 056-98 dated May 21, 1998; BIR Ruling No. ITAD-031-99 dated October 7, 1999; BIR Ruling No. ITAD-172-03 dated November 17, 2003; BIR Ruling No. ITAD-077-02 dated May 2, 2002) 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