ITAD BIR Ruling No. 112-11

April 11, 2011 ITAD BIR RULING NO. 112-11 Article 10, Philippines-France Tax Treaty; BIR Ruling No. ITAD-017-01; BIR Ruling No. ITAD-004-02; BIR Ruling No. ITAD-064-03; BIR Ruling No. ITAD-196-03; BIR Ruling No. ITAD-101-04 Cochingyan & Peralta Law Offices 12th Floor, 139 Corporate Center 139 Valero Street Salcedo Village, Makati City Attention: Mr. Jose Cochingyan III Managing Partner Gentlemen : This refers to your letter dated September 15, 2008, on behalf of MERIAL S.A.S. (hereinafter referred to as "Merial S.A.S." ), requesting for the application of the preferential tax rate of ten percent (10%) on the gross amount of the dividends paid by MERIAL PHILIPPINES, INC. (hereinafter referred to as "Merial Phils" ) to Merial S.A.S. pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-France tax treaty" ). HSIDTE It is represented that Merial S.A.S. is a nonresident foreign corporation organized and existing under the laws of France with principal office address at 13bis, Avenue Albert Einstein, 69623 Villeurbanne Cedex, France with Tax Identification Number: 590 800 215 as evidenced by the Attestation De Residence Fiscale dated June 27, 2008; that Merial S.A.S. is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration issued by the Securities and Exchange Commission on August 7, 2008; that Merial Phils is a corporation duly organized and existing under the laws of the Republic of the Philippines, with office address at Unit 2504, 25/F Discovery Centre, 25 ADB Avenue, Ortigas Center, Pasig City; that as of May 7, 2007, Merial S.A.S. is the principal stockholder of Merial Phils holding Three Hundred Ninety-Five Thousand Nine Hundred Eighty-Five (395,985) paid-up shares out of its Three Hundred Ninety-Six Thousand (396,000) total issued and outstanding capital stock with a total amount of Thirty-Nine Million Five Hundred Ninety-Eight Thousand Five Hundred Pesos (PhP39,598,500.00), representing more than 99.99% of the outstanding and voting shares of stocks of Merial Phils as evidenced by the Secretary's Certificate issued by Merial Phils dated July 9, 2010. It is further represented that during a special meeting of the Board of Directors of Merial Phils on May 2, 2007, the members unanimously approved Resolution No. 2007-0502-01 declaring cash dividends from the surplus retained earnings of Merial Phils' accumulated as of fiscal year ending December 31, 2006, in the amount of Php88.37 per share, in the total amount of Thirty-Four Million Nine Hundred Ninety-Four Thousand Five Hundred Twenty Pesos (Php34,994,520.00) to the stockholders of record as of May 2, 2007, payable on May 11, 2007; that during the Annual Organizational Meeting of the Board of Directors of Merial Phils on April 22, 2008, Resolution No. 2008-0422 was unanimously approved authorizing the declaration of cash dividends from the surplus retained earnings of the corporation accumulated as of fiscal year ending December 31, 2007, in the amount of Php106.05 per share, or a total amount of Forty-One Million Nine Hundred Ninety-Five Thousand Eight Hundred Pesos (Php41,995,800.00) to stockholders of record as of April 22, 2008, payable on or before May 30, 2008; and that the subject transaction is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: "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 . . ., dividends, . . .: 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 Tax Code of 1997, as amended provides: "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" In relation thereto, the provisions of the Philippines-France tax treaty may apply to the instant case. Article 10 of the said treaty: CSHEca "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 (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 25 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the above provision, dividends paid to a company which is a resident of France may be taxed in the Philippines at a preferential rate not exceeding fifteen percent (15%) of the gross amount of dividends if the recipient is a company which owns at least ten percent (10%) of the voting shares of the company paying the dividends, and a rate not exceeding twenty-five percent (25%), in all other cases. However, a Protocol amending the Philippines-France tax treaty took effect on January 1, 2000, Article 5 of which reads as follows: "Article 5 In Article 10 of the Convention: In paragraph 2, the rates of "15 percent" and "25 percent" are replaced respectively by "10 percent" and "15 percent" ;" (Italics supplied) Based on the above provision of the Protocol, the preferential tax rates on the dividends were reduced from 15 percent and 25 percent to 10 percent and 15 percent, respectively. Hence, since Merial S.A.S. is a resident of France which holds 99.99% of the outstanding and voting shares of Merial Phils as of May 7, 2007 and April 22, 2008, the dividends paid by Merial Phils to Merial S.A.S. on the dividend declarations on May 2, 2007 and April 22, 2008 are subject to tax at the rate of 10 percent based on the gross amount of dividends. (BIR Ruling No. ITAD-017-01 dated February 19, 2001; BIR Ruling No. DA-ITAD-004-02 dated January 11, 2002; BIR Ruling No. DA-ITAD-064-03 dated April 25, 2003; BIR Ruling No. DA-ITAD-196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-101-04 dated September 13, 2004) 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 connected. HDaACI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue