ITAD BIR Ruling No. 115-14

July 21, 2014 ITAD BIR RULING NO. 115-14 Article 10, Philippines-Netherlands tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your tax treaty relief application filed on July 31, 2013 requesting confirmation on your opinion that the dividends paid by Pfizer, Inc. ("Pfizer-Phils") to Pfizer B.V. ("Pfizer") are subject to preferential tax rate pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). Facts Pfizer is a foreign corporation and a resident of the Netherlands based on its amended Articles of Association and Declaration of Residence issued by the Tax Administration of Arnhem in the Netherlands on December 11, 2013. Pfizer is located at Rivium Westlaan 142, 2909LD Capelle aan den Ijssel, Netherlands. Pfizer is a company the capital of which is divided into shares with a nominal value of 250 euros per share. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration issued by the Securities and Exchange Commission on June 20, 2013. On the other hand, Pfizer-Phils is a domestic corporation located at 23rd Floor, Ayala Life-FGU, Center, 6811 Ayala Avenue, Makati City, Philippines. Based on the Secretary's Certificate issued on January 20, 2014, the Board of Directors of Pfizer-Phils ,during a special meeting on July 30, 2013, approved a resolution declaring cash dividends amounting to US$50,000,000.00 (P2,164,000,000.00) in favor of the company's stockholders of record as of July 30, 2013, and payable on August 15, 2013. As of record date on July 30, 2013 and payment date on August 15, 2013, Pfizer holds 37.84 percent of the common shares of stock of Pfizer-Phils as described below: CETDHA Stockholder Number and Mode of Acquisition Percentage of Value of Shares Acquisition Date Ownership Pfizer 6,942,866 Original April 23, 2001 37.84 (P694,286,600.00) subscription percent Based on the Certification issued by Standard Chartered Bank 1 on December 2, 2013, the dividends were remitted by Pfizer-Phils to Pfizer on August 15, 2013. Finally, it is represented that the issue or transaction subject of the above application is 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 Sworn Statement issued by the Legal Director of Pfizer-Phils on June 6, 2013. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" AaSTIH Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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: 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, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." DHaECI In this particular case, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "Article 10 Dividends 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases." Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends, and 15 percent in all other cases. cDCaTH Accordingly, since Pfizer is a company in the Netherlands the capital of which is wholly divided into shares, and that Pfizer holds directly at least 10 percent of the capital of Pfizer-Phils (as represented by shares) and where Pfizer holds 37.84 percent of these shares, such dividends paid by Pfizer-Phils to Pfizer shall be subject to income tax rate of 10 percent , pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands 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 Footnotes 1. Located at Standard Chartered Bank Building, 6788 Ayala Avenue, Makati, Philippines. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.