ITAD BIR Ruling No. 091-11

March 14, 2011 ITAD BIR RULING NO. 091-11 Article 10, Philippines-China tax treaty; Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City, Taguig Attention: Dennis G. Dimagiba Maria Ana Camila C. Jacinto Gentlemen : This refers to your Tax Treaty Relief Application dated July 7, 2010, requesting confirmation that the dividends paid by the AYALA LAND, INC. ("ALI") to BEST INVESTMENT CORPORATION ("BIC") are subject to the preferential tax rate of 15 percent, pursuant to the provisions of Article 10 (2) (b) of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-China Tax Treaty") . aHcDEC It is represented that BIC is an investment company organized and existing under the laws of the People's Republic of China, with principal business address at Suite 936, No. 2 Building, No. 1 Complex, Nao Shi Kou Da Jie, Xicheng District, Beijing, People's Republic of China; that per Certificate of Chinese Fiscal Resident issued by the Chinese State Administration of Taxation, dated June 11, 2010, BIC is a Chinese fiscal resident; that BIC is not registered as a corporation or as a partnership licensed to do business in the Philippines as evidenced by the Certification of Non-Registration issued by the Securities and Exchange Commission dated July 6, 2010; and that, on the other hand, ALI is a domestic corporation, organized and existing under the laws of the Philippines, with office address at BPI Building, Ayala corner Paseo de Roxas, Makati City. It is also represented that BIC holds Eighteen Million Two Hundred Eight Thousand Nine Hundred (18,208,900) common shares with a par value of Ten Pesos (P10.00) per share, representing 0.5608% of the total issued and outstanding capital stock of ALI, per Secretary's Certificate issued by ALI dated July 6, 2010; that at the meeting of the Board of Directors of ALI held on June 1, 2010, it was resolved that a cash dividend in the amount of Forty Five Centavos (P0.45) per common share corresponding to the first semester ending June 30, 2010, be paid on July 23, 2010 to all outstanding common share stockholders of the company as of June 30, 2010; and that the transaction subject of the above request for ruling is not under investigation, or subject of an 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: ECDaAc 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 accordance with the foregoing, Article 10 of the Philippines-China Tax Treaty provides as follows: "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 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. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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 laws of the 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 China at a rate not exceeding 10 percent of the gross amount 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 BIC owns less than 10 percent of the capital of ALI, the paying corporation, this Office is of the opinion and so holds that the cash dividends to be remitted by ALI to BIC are subject to the preferential rate of 15 percent withholding tax pursuant to Article 10 (2) (b) of the Philippines-China Tax Treaty. DTAESI 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