ITAD BIR Ruling No. 110-13

April 11, 2013 ITAD BIR RULING NO. 110-13 Article 10, Philippines-Singapore tax treaty Brady Philippines Direct Marketing, Inc. 3rd Floor Worldwide Corporate Center, Shaw Boulevard Mandaluyong City Gentlemen : This refers to your tax treaty relief application (TTRA) filed on July 30, 2012 requesting for confirmation that the dividends paid by Brady Philippines Direct Marketing, Inc. ("Brady PH") to Brady Corporation Asia Pacific Pte. Ltd. ("Brady SG") are subject to preferential income tax rate of 15 percent pursuant to 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") . It is represented that Brady SG is a foreign corporation organized and existing under the laws of Singapore and is a resident thereof with principal address at 80 Raffles Place, #32-01, Singapore based on the Certificate of Residence issued by the Inland Revenue Authority of Singapore on June 8, 2012; that Brady SG is not registered as corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on July 31, 2012; that, on the other hand, Brady PH is a domestic corporation with principal business address at the 3rd Floor Worldwide Corporate Center, Shaw Boulevard, Mandaluyong City. It is further represented that on June 1, 2012, Brady PH declared cash dividends amounting to PhP75,000,843.00 to be distributed to all stockholders of record as of July 31, 2012 based on the Certificate of the corporate secretary of Brady PH issued on July 30, 2012; that Brady SG holds 110,000 common shares in Brady PH inclusive of five nominee shares, with a par value of PhP110,000,000.00, constituting 100 percent ownership in Brady PH since February 19, 2007 based on the Certificate of the corporate secretary of Brady PH issued on July 30, 2012; and that, said dividends were paid to Brady SG by Brady PH on July 31, 2012 based on the Certificate of Remittance issued by the Bank of America Merrill Lynch on December 17, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, provides that dividends derived by non-resident foreign corporations not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: ICDcEA "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 same Code provides that such dividends may be exempt from income tax or partially exempt (if subject to a reduced rate only) to the extent required by any treaty obligation on the Philippines, thus: "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" For this purpose, you invoke the Philippines-Singapore 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 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. xxx xxx xxx" (emphasis supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines at a rate not to exceed (a) 15 percent of the gross amount of the dividends if the company or recipient of the dividends owns at least 15 percent of the outstanding voting stock of the company paying the dividends during the part of the latter's taxable year immediately preceding 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 Brady SG owns 100 percent of the shareholdings of Brady PH during the part of Brady PH's taxable year immediately preceding the date of payment of the dividends and during the whole prior taxable year of 2011, in fact since February 19, 2007, such dividends paid by Brady PH to Brady SG are subject to a preferential tax rate of 15 percent pursuant to paragraph 2 (a), Article 10 of the Philippines-Singapore 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