ITAD BIR Ruling No. 103-16

June 22, 2016 ITAD BIR RULING NO. 103-16 Article 11 (Dividends), Philippines-United States tax treaty Dentsply (Phils.), Inc. 5th Floor I-Care Building Legaspi Street corner Dela Rosa Streets Legaspi Village, Barangay San Lorenzo Makati City Attention: Mrs. Elaine L. Amparo Finance Controller Gentlemen : This refers to your tax treaty relief application filed on September 13, 2013 requesting confirmation on your opinion that the dividends paid by Dentsply (Phils.), Inc. ("Dentsply-Phils") to DENTSPLY International, Inc. ("DENTSPLY") are subject to preferential tax rate pursuant to 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 tax treaty"). Facts DENTSPLY is a foreign corporation and a resident of the United States of America based on its amended and restated Articles of Incorporation and Certification of Residence issued by the Internal Revenue Service of the United States on August 21, 2012. DENTSPLY is located at 221 West Philadelphia, City of York, Pennsylvania, United States of America. DENTSPLY is a company with an authorized capital of US$2,250,000.00 divided into 200,000,000 common shares, each share with a par value of US$0.01 and 250,000 preferred shares, each share with a par value of US$1.00. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on September 11, 2013. On the other hand, Dentsply-Phils is a domestic corporation located at 5th Floor I-Care Building, Legaspi Street corner Dela Rosa Streets, Legaspi Village, Barangay San Lorenzo, Makati City, Philippines. As per the Secretary's Certificate and Certification issued on August 29, 2013 and January 7, 2014, the Board of Directors of Dentsply-Phils , during its special meeting on July 30, 2013, approved a resolution declaring cash dividends amounting to P63.36 per share in favor of the company's stockholders of record as of December 31, 2012, and payable on or before November 30, 2013. As of record date on December 31, 2012, DENTSPLY holds 99.99 percent of the outstanding common shares of stock of Dentsply-Phils as described below: SICDAa Stockholder Number and Mode of Acquisition Percentage of Value of Shares Acquisition Date Ownership DENTSPLY 130,850 Subscription March 1996 (P13,085,000.00) 154,650 Subscription May 2001 99.99 percent (P15,465,000.00) Total 130,850 (P28,550,000.00) ================ Based on the Cable Orders issued by Union Bank of the Philippines 1 on October 18, 2013 and October 21, 2013, the dividends were remitted by Dentsply-Phis to DENTSPLY on as follows: Date of Remittance Amount October 18, 2013 US$333,059.24 October 21, 2013 US$999.49 Total US$334,058.73 ============ Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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: 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." In this particular case, you invoke the Philippines-United States tax treaty. Paragraphs 1 and 2, Article 11 thereof provide: "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 DHIcET 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the United States may be taxed in the Philippines at a rate not to exceed 25 percent of the gross amount of the dividend, and 20 percent if the recipient is a corporation if it holds at least 10 percent of the outstanding shares of the voting stock of the paying corporation 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. Accordingly, considering that DENTSPLY is a company in the United States the capital of which is wholly divided into shares, and that DENTSPLY holds directly at least 10 percent of the outstanding shares of the voting stock of Dentsply-Phils (as represented by shares) during the part of Dentsply-Phils' taxable year which precedes the date of payment of dividends on October 18, 2013 and where DENTSPLY holds 99.99 percent of these shares since May 2001, such dividends paid by Dentsply-Phils to DENTSPLY shall be subject to income tax rate of 20 percent , pursuant to paragraph 2 (b), Article 11 of the Philippines-United States 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 Footnotes 1. Located at Ground Floor, SSS Building, Ayala Avenue corner V.A. Rufino Street, Makati City, Philippines. n Note from the Publisher: Copied verbatim from the official document. The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.