ITAD BIR Ruling No. 091-13

April 4, 2013 ITAD BIR RULING NO. 091-13 Article 10, Philippines-Switzerland tax treaty Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower 122 Valero Street, Salcedo Village 1227 Makati City Attention: Atty. Maria Victoria D. Sarmiento Atty. Alvin O. Geli Atty. Marites C. Sy Gentlemen : This refers to your tax treaty relief application filed on October 1, 2012, requesting confirmation that dividends paid by FIRMENICH PHILIPPINES, INC. ("Firmenich Philippines") to FIRMENICH TRADING CORPORATION ("Firmenich") are subject to income tax at 10 percent preferential tax rate pursuant to 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") . It is represented that Firmenich is a foreign corporation organized and existing under the laws of Switzerland and a resident of Switzerland based on the Certificate of Residence issued by the Administration Fiscale Cantonale on February 10, 2012; that Firmenich is situated at Route Des Judnes I, 1227 Geneve 8, Switzerland; that Firmenich is not registered as a corporation or partnership in the Philippines based on Certification of Non-Registration of Company issued by the Securities and Exchange Commission ("SEC") on September 26, 2016; that Firmenich Philippines is a domestic corporation situated at 2nd Floor, UPRC III Building, 2289 Pasong Tamo Extension, Makati City, Philippines. On September 26, 2012, the Board of Directors of Firmenich Philippines , at its special meeting, declared cash dividends in the amount of P16,560,711.00 out of the Corporation's unrestricted retained earnings as of fiscal year 2012 in favor of the stockholders as of records record date of June 30, 2012 which was paid on December 13, 2012 per proof of bank remittance attached to the Sworn Certification of the Treasurer of Firmenich Philippines dated December 13, 2012; and that Firmenich holds 130,750 common shares equivalent to P13,075,000.00 which constitute 100 percent of the shares Firmenich Philippines based on the Secretary's Certificate dated September 26, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividend paid to Firmenich, a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 interests, 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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividend may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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" With respect to a treaty, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "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. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. 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 taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Switzerland may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of 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; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as Firmenich, the recipient of the dividend from Firmenich Philippines, holds directly 100 percent of the capital of Firmenich Philippines , such dividends paid by Firmenich Philippines to Firmenich are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Switzerland tax treaty. 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