ITAD BIR Ruling No. 113-16

June 22, 2016 ITAD BIR RULING NO. 113-16 Article 10, Philippines-Malaysia tax treaty Quiason Makalintal Barot Torres Ibarra & Sison Law Firm 21st Floor, Robinsons-Equitable Tower 4 ADB Avenue Corner Pedro Poveda Street 1605 Ortigas Center, Pasig City Attention: Jose Luiz Z. Aliling Benedict R. Tugonon Authorized Representatives Gentlemen : This refers to your tax treaty relief application filed on September 30, 2013 requesting for confirmation that dividends paid by BIOLITE, INC. ("Biolite Phil") to TANDEM ASIA LIMITED ("Tandem Asia") are subject to a preferential tax rate of 15 percent pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Malaysia tax treaty") . It is represented that Tandem Asia is a foreign corporation organized and existing under the laws of Malaysia based on the Certificate of Status of Tax Residence issued by the Inland Revenue Board of Malaysia on June 19, 2013; that Tandem Asia is not registered as a corporation or partnership in the Philippines based on the Certification issued by the Securities and Exchange Commission on September 27, 2013; and that, on the other hand, Biolite Phil is a domestic corporation organized and existing under Philippine laws. It is further represented that the Board of Directors of Biolite Phil , at its special meeting held on December 20, 2012 declares cash dividend in the amount of Ten Million Pesos (Php10,000,000.00) in favor of stockholders on record as of December 31, 2012 payable on October 15, 2013 based on the Certificate issued by the Corporate Secretary of Biolite Phil on December 27, 2012; that as of December 31, 2012, Tandem Asia held a total of 40,000 or 40 percent of the outstanding common shares of Biolite Phil , based on the Certificate issued by the same Corporate Secretary on December 27, 2012. 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. 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 Certification issued by the Corporate Secretary of Biolite Phil on September 20, 2013. CAIHTE In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to Tandem Asia , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 Code provides that such 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: "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 this particular case, you invoke the Philippines-Malaysia tax treaty. Article 10 thereof provides: "Article 10 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. Dividends paid by a company which is a resident of the Philippines to a resident of Malaysia who is subject to tax in Malaysia in respect thereof, may be taxed in the Philippines in accordance with the laws of the Philippines 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; b) in all other cases, 25 per cent of the gross amount of the dividends. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Malaysia may be taxed in the Philippines at a rate not to exceed: (a) 15 percent of the gross amount of the dividends if the recipient is a company; and (b) 25 percent of the gross amount of the dividends in all other cases. DETACa This being the case, and considering that Tandem Asia is a company which holds 40 percent of the capital of Biolite Phil , this Office is of the opinion and so holds that such dividends paid by Biolite Phil to Tandem Asia are subject to income tax at a preferential rate of 15 percent based on the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Malaysia 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