ITAD BIR Ruling No. 111-15

April 30, 2015 ITAD BIR RULING NO. 111-15 Article 11 (Dividends) Philippines-Thailand tax treaty UAM Philippines, Inc. Lot 33 Second St., Corner Road, FPIP Tanauan City, Batangas Attention : Yasuyuki Isoda President Gentlemen : This refers to your tax treaty application ("TTRA") filed on July 2, 2014, requesting confirmation that dividends paid by UAM Philippines, Inc. ("UAMPI") to Union Autoparts Manufacturing Co., Ltd. ("UAMCL") are subject to income tax at the rate of 15% pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand with respect to Taxes on Income ("Philippines-Thailand tax treaty"). It is represented that UAMCL is a foreign corporation organized and existing under the laws of Thailand; that it is not registered as a corporation or a partnership in the Philippines per SEC certification issued on June 18, 2014; and that on the other hand, UAMPI is a domestic corporation duly organized and existing under the laws of the Philippines. It is also represented that UAMCL is the registered owner of Nine Hundred Twenty-Four Thousand Nine Hundred Ninety-Four (924,994) common shares constituting 99.99% of the issued and outstanding shares in UAMPI as of the date of dividend payment on July 30, 2014; that these shares were acquired on March 3, 2005, October 15, 2006 and October 15, 2010. It is also represented that on March 7, 2014 the Board of Directors of UAMPI declared cash dividends amounting to P5,065,559.43 in favor of all its stockholders of record as of March 6, 2014, representing forty percent of its unrestricted retained earnings, to be taken out of the unrestricted retained earnings of the Corporation as of December 31, 2013 and to be paid not later than July 30, 2014. It is also represented, per sworn certification issued by the Corporate Secretary of UAMPI on June 11, 2014, that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to UAMCL are subject to income tax at the rate of 30 percent, thus: SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Non-resident 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, these dividends may be 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-Thailand tax treaty, as amended. Paragraphs 1 & 2 of Article 11 thereof provide: " Article 11 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 of the dividends is a company which holds directly at least 15 per cent of voting shares of the company paying the dividends, the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the company paying the dividends is a Philippine company or if the company paying the dividends is a Thai company engaged in an industrial undertaking; b) 20 per cent of the gross amount of the dividends if the company paying the dividends is a Thai company not engaged in an industrial undertaking." Under paragraph 2 of Article 11, dividends arising in the Philippines and paid to a resident of Thailand may be taxed in the Philippines. However, if the recipient of the dividends is a company which holds directly at least 15 percent of voting shares of the company paying the dividends, the tax so charged shall not exceed (a) 15 percent of the gross amount of the dividends if the company paying the dividend is a Philippine company or if the paying dividend is a Thai company engaged in an industrial undertaking; and (b) 20 percent of the gross amount of the dividends if the company paying the dividends is a Thai company not engaged in an industrial undertaking. Accordingly, the dividend paid by UAMPI to UAMCL is subject to income tax at the rate of fifteen percent (15%) of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Thailand tax treaty as (1) UAMCL holds 924,994 shares constituting 99.99 percent of the total shares of UAMPI, which is more than fifteen percent (15%) of the capital of the said company ; and (2) the company paying the dividends, UAMPI is a Philippine company. 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.