ITAD BIR Ruling No. 118-11

April 11, 2011 ITAD BIR RULING NO. 118-11 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. ITAD-68-10 DBS Manila Representative Office 18 Floor, BPI Main Building 6768 Ayala Avenue corner Paseo de Roxas Makati City Attention: Edgardo Legarda Chief Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on January 3, 2011, requesting confirmation that the dividend payments of Ayala DBS Holdings, Inc. ("Ayala") to DBS Bank Ltd. ("DBS") are subject to final withholding tax at the preferential rate of 15 percent, pursuant to Article 10 (2) (a) of the 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"). DAaEIc It is represented that DBS is a corporation organized and existing under the laws of Singapore and is a resident of Singapore having its registered address at 6 Shenton Way Singapore 068809 based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated April 3, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 29, 2010; and that, on the other hand, Ayala is a corporation organized and existing under the laws of the Philippines with principal address at Tower One Ayala Triangle, Ayala Avenue, Makati City 1226. It is further represented, based on the Secretary's Certificate issued by Ayala dated February 8, 2011, that DBS holds 101,203,056 shares of Class B common stock out of the total 253,007,641 issued and outstanding shares of Ayala, representing 40% of the total issued and outstanding shares of the latter; that the subject shares were held by DBS during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year; that at the regular meeting held on December 10, 2010, the Board of Directors of Ayala approved the declaration of a cash dividend in the total amount of Six Hundred Eighty-Two Million Forty-Eight Thousand Two Hundred Thirty-Five Pesos (P682,048,235.00) out of the unappropriated retained earnings of Ayala as of December 20, 2010, and payable on January 14, 2011. It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per Secretary's Certificate issued by Ayala dated December 21, 2010. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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 interest, 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%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this particular case, you invoked Article 10 of the Philippines-Singapore tax treaty. It provides: "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. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident." Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. DEcITS Since DBS holds 40 percent of the total outstanding and voting shares of Ayala during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, which is more than the required shareholdings of 15 percent, the dividends received by DBS shall be subject to the preferential tax rate of 15 percent, pursuant to the Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-68-10 dated December 3, 2010) 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