ITAD BIR Ruling No. 099-11

March 21, 2011 ITAD BIR RULING NO. 099-11 Article 10 (Dividends) Philippines-Singapore tax treaty; BIR Ruling No. 10-84; BIR Ruling No. DA-ITAD 25-10; BIR Ruling No. DA-ITAD 12-10; BIR Ruling No. DA-ITAD 9-10; BIR Ruling No. DA-ITAD 90-08 Laguna Dai-Chi, Inc. 103 North Science Avenue, Laguna Techno SEPZ Bian, Laguna Attention: Mr. Akio Kuroda President Gentlemen : This refers to your application for tax treaty relief dated October 15, 2010 requesting confirmation that dividends paid by Laguna Dai-Ichi, Inc. ("Laguna Dai-Ichi") to Singapore Dai-ichi PTE. LTD. (Singapore Dai-Ichi) are subject to income tax in the Philippines at a rate not to exceed 15 percent based on the gross amount thereof pursuant to 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") . 1 Basic Facts It is represented that Singapore Daichi is a foreign corporation organized and existing under the laws of Singapore and is a resident thereof, based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore dated November 1, 2010; Singapore Daichi is situated at 55 Yishun Industrial Park A Singapore 768728; that Singapore Daichi is not registered as a corporation or as partnership in the Philippines based on the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission (SEC) dated October 11, 2010; and that, on the other hand, Laguna Dai-ichi is a domestic corporation situated at 103 North Science Avenue, Laguna Techno SEPZ, Philippines. It is also represented based on the Certificate issued by the Corporate Secretary of Laguna Dai-ichi that: 1. On August 18, 2010 the Board of Directors of Laguna Dai-ichi approved a resolution declaring cash dividends amounting to Php150,000,000.00 in favor of the stockholders of record as of July 31, 2010, to be paid on October 31, 2010; and 2. Since June 12, 2008 up to the present, Singapore Dai-ichi holds 99,986 common shares of Laguna Dai-ichi each share with a par value of Php1,000.00 or a total par value of Php99,986,000.00, which represent 99.986 percent of Laguna Dai-ichi's outstanding capital stock. It is finally represented that the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings, or judicial appeal based on the Sworn Statement issued by the President of Laguna Dai-ichi on October 14, 2010. Ruling A. On Income Tax In reply, please be informed that dividends derived by Singapore Dai-ichi, being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax in the Philippines at the rate of 30 percent of the gross amount thereof. Section 28 (B) (1) (a) of the National Internal Revenue Code of 1997 ("Tax Code of 1997") , as amended, provides: "SEC. 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) and (d) above: Provided, That effective 1, 2009, the rate of income tax shall be thirty percent (30%)" However, any income derived by a foreign corporation may be exempt (or partially exempt if subject to a reduced rate only) if the same is so exempt (or partially exempt) to the extent required by any treaty obligation binding upon the Philippine Government. Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "SEC. 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: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." With respect to a treaty, what is being invoked for this purpose is the Philippines-Singapore tax treaty. Paragraphs 1 and 2, Article 10 thereof provide 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 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. xxx xxx xxx" Under paragraph 2 of Article 10, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 15 percent of the gross amount of the dividends if the recipient is a company (including a partnership) which holds at least 15 percent of the outstanding shares of the voting stock of the company paying the dividends during the part of the company's taxable year which precedes the date of payment of the dividends and during the whole of its prior taxable year (if any); and (b) 25 percent of the gross amount of the dividends in all other cases. Accordingly, since Singapore Dai-ichi owns at least 15 percent (in fact, 99.986 percent) of the outstanding shares of the common (voting) stock of Laguna Dai-ichi during the taxable year when the dividends were paid and during the whole taxable year prior to the payment of the dividends, such dividends to be paid by Laguna Dai-ichi to Singapore Dai-ichi subject to income tax at the rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2 (a) Article 10 of the Philippines-Singapore tax treaty. (BIR Ruling 10-84 dated January 19, 1984; BIR Ruling No. DA-ITAD 25-10 dated February 19, 2010; BIR Ruling No. DA-ITAD 12-10 dated February 1, 2010; BIR Ruling No. DA-ITAD 9-10 dated February 1, 2010; and BIR Ruling No. DA-ITAD 90-08 dated November 5, 2008.) 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 Footnotes 1. Signed on August 1, 1977, and effective January 1, 1977.