ITAD BIR Ruling No. 106-13

April 11, 2013 ITAD BIR RULING NO. 106-13 Article 10 (Dividends), Philippines-Germany tax treaty Du-Baladad and Associates 20th Floor Chatham House Rufino, corner Valero Streets Salcedo Village, Makati City Attention: Atty. Benedicta Du-Baladad Gentlemen : This refers to your application for tax treaty relief filed on June 14, 2012 requesting confirmation that dividends to be paid by the Siemens, Inc. ("Siemens PH") to Siemens Aktiengesellschaft ("Siemens AG") are subject to income tax at the rate of 10 percent pursuant to the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . It is represented that Siemens AG is a corporation organized and existing under the laws of Germany and is a resident thereof based on the Certification issued by the tax authority in Germany, on January 2, 2012; that Siemens AG was issued a license to establish its regional or area headquarters in the Philippines on May 30, 1977 but its petition for the cancellation of said license was approved on October 4, 1983 based on the Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission on April 24, 2012; and that on the other hand, Siemens PH is a domestic corporation situated at 14th Floor, Salcedo Tower, 169 H.V. dela Costa Street, Salcedo Village, Makati City. It is further represented, based on the Certificates issued by the Corporate Secretary of Siemens PH on June 8, 2012, that the Board of Directors of Siemens PH issued the following resolutions: Date of Dividend Declaration January 11, 2012 February 9, 2011 Amount of Dividend Declaration PhP420,000,000.00 PhP144,000,000.00 Stockholders of Record February 28, 2012 February 9, 2011 Date/s of Payment Fourth Quarter of First Tranch: Third Fiscal Year 2012 quarter of Fiscal Year 2011 Second Tranch: Fourth quarter of Fiscal year 2012 that based on the Certifications, Siemens AG is the registered owner of 94,993 common shares or 100 percent of all the issued and outstanding shares in Siemens PH with a par value of PhP1,000.00 per share; and that for the dividends payable on the fourth quarter of fiscal year 2012, except for the initial payment on the 3rd quarter of 2011, no payment has been made based on the Certifications issued by the Chief Financial Officer of Siemens PH on June 27, 2012 and October 15, 2012. ETIDaH It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the respective Sworn Statements issued by the General Counsel of Siemens PH on May 18, 2012. In reply, please be informed that Section 14 of Revenue Memorandum Order No. (RMO) 72-2010 1 which took effect on November 4, 2010, provides that: "SEC. 14. When and Where to File the TTRA . All tax treaty relief applications (updated BIR Forms No. 0901-D, 0901-I, 0901-R, 0901-P, 0901-S, 0901-T, 0901-O and 0901-C) relative to the implementation and interpretation of the provisions of Philippine tax treaties shall only be submitted to and received by the International Tax Affairs Division (ITAD). If the forms or any necessary documents are submitted to any other BIR Office, the application shall be considered as improperly filed. Filing should always be made BEFORE the transaction. Transaction for purposes of filing the TTRA shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed herein shall have the effect of disqualifying the TTRA under this RMO. " (emphasis supplied) In this case, the TTRA was filed only on June 14, 2012 covering the dividend declarations on February 9, 2011 and January 11, 2012. Accordingly, payments made on or before June 14, 2012 did not comply with the requirement laid down in the RMO above-quoted, providing that the TTRA should be filed before the taxable event. Hence, it cannot avail of the preferential tax rate provided under the Philippines-Germany tax treaty and is therefore taxable under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, thus: "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 January 1, 2009, the rate of income tax shall be thirty percent (30%)." SCaEcD However, for dividend payments made on June 15, 2012 and thereafter, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." For this purpose, you invoke the Philippines-Germany 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 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 the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of dividends." Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of Germany may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient of the dividends is a company which owns directly at least 25 percent of the capital of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, considering that Siemens AG holds 100 percent of the capital of Siemens PH, such dividend payments made on June 15, 2012 and thereafter 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-Germany 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. THaCAI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Guidelines on the Processing Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties.