Navarro Amper and Co.

November 19, 2018 ITAD BIR RULING NO. 118-18 Article 10 (Dividends), Philippines- Singapore tax treaty Navarro Amper and Co. 19th Floor, Net Lima Plaza 5th Avenue corner 26th Street Bonifacio Global City 1634 Taguig City Attention: AAA _______________ Gentlemen : This refers to your tax treaty relief application filed on December 21, 2012 requesting confirmation that cumulative dividends paid by SteelAsia Manufacturing Corporation (" SteelAsia ") (formerly Tempcore Steel Corporation ) to NatSteel Asia Pte. Ltd. (" NatSteel ") (formerly NatSteel AsiaSteel Pte. Ltd. ) upon the redemption of SteelAsia 's preferred shares are subject to income tax at the rate of 15% pursuant to 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 "). FACTS NatSteel is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its amended Memorandum and Articles of Association, the Business Profile issued by the Registrar of Companies and Businesses of Singapore, and Certificate of Residence issued by the Inland Revenue Authority of Singapore. NatSteel is engaged in the business of iron masters, steel makers, steel converters, colliery proprietors, coke manufacturers, miners, smelters, engineers, among others. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, SteelAsia is a domestic corporation engaged in manufacturing, importing, exporting, selling, and dealing in tempcore rebar, wire, rods, rebars, deformed steel bars for concrete reinforcing, profile sections, stirups and trusses, steel products, and equipment, materials, supplies used or employed in or related to the manufacture of such products, based on its amended Articles of Incorporation (" AOI "), General Information Sheet (" GIS ") as of June 22, 2010 and Audited Financial Statements (" AFS ") as of December 31, 2012. Based on the AOI, GIS and AFS and Corporate Secretary's certificates submitted, SteelAsia has an authorized capital stock amounting to P _______________ , divided into 50,000,000 common shares and 37,040,274 preferred shares. Each share has a par value of P_____ or total value amounting to P _______________ for common shares and P _______________ for preferred shares. NatSteel owns 20,000,000 common and 37,040,274 preferred shares accounting for 65.53% ownership in SteelAsia , and 40% of voting shares of SteelAsia . 1 NatSteel owns all common shares since February 2005 and all preferred shares since October 2009, by secondary purchase. Preferred shares earn cumulative dividends at the rate of 1% per annum from August 28, 2008 to August 27, 2009; 6% per annum from August 28, 2009 to August 27, 2011; and 6% per annum from August 28, 2011 to December 31, 2012. Preferred shares do not entitle the holder thereof to any further participation in the assets of SteelAsia on a winding up or other repayment of the company's capital after redemption or receipt of payment in full of the nominal amount of the preferred shares together with cumulative dividends pertaining thereto. Redeemed shares will be cancelled and will not be re-issued. On December 28, 2012, SteelAsia redeemed all of its 37,040,274 preferred shares held by NatSteel where SteelAsia paid NatSteel a redemption price amounting to P _______________ consisting of the nominal value of the shares (P _______________ ) and cumulative dividends (P _______________ ). Based on the sworn statement issued by SteelAsia , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. RULING A. Income tax In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended (" Tax Code "), income derived by a foreign corporation not engaged in trade or business is subject to income tax at the rate of 30%, 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 income shall be exempt to the extent required by any treaty obligation binding upon the Philippine government, 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." For this purpose, paragraph 2, Article 10 of the Philippines-Singapore tax treaty provide: " 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." Under Article 10, dividends arising in the Philippines and paid to a resident of Singapore are subject to income tax in the Philippines at the rate of (a) 15% if the recipient is a company (including partnership) which holds at least 15% of the outstanding shares of the voting stock of the company paying the dividends, during the part of that company's taxable year which precedes the date of payment of the dividends and during the whole of its prior taxable year (if any); and (b) 25% in all other cases. Accordingly, since NatSteel is a company resident of Singapore, which holds at least 15% of the outstanding shares of the voting stock of SteelAsia during the part of that company's taxable year which precedes the date of payment of the dividends and during the whole of its prior taxable year, cumulative dividends paid by the latter to the former upon redemption of preferred shares are subject to income tax at the rate of 15% pursuant to paragraph 2 (b), Article 10 of the Philippines-Singapore tax treaty. As represented, NatSteel owns 40% of the voting shares of SteelAsia since February 2005, i.e. , prior to the redemption of the preferred shares on December 28, 2012. B. Documentary stamp tax On documentary stamp tax (" DST "), Section 4 of Revenue Regulations No. 13-2004 2 clarifies that for a sale or exchange to be subject to DST, there must be an actual or constructive transfer of beneficial ownership over the shares from one person to another, thus: " SECTION 4. New Rate of DST on Sales, Agreements to Sell, Memoranda of Sales, and Subsequent Transfer of Shares of Stocks. xxx xxx xxx All transfer of shares of stock of a domestic corporation are subject to the DST upon execution of the deed transferring ownership or rights thereto, or upon delivery, assignment or indorsement of such shares in favor of another. No transfer of shares of stock shall be recorded unless DST thereon has been duly paid for in accordance with section 201 of the Code. For a sale or exchange to be taxable, there must be an actual or constructive transfer of beneficial ownership of the shares of stock from one person to another. Such transfer may be manifested by the clear exercise of attributes of ownership over such stocks by the transferee, or by an actual entry of a change in the name appearing in the certificate of stock or in the Stock and Transfer Book of the issuing corporation or by any entry indicating transfer of beneficial ownership in any form of registry including those of a duly scripless registry, such as those maintained for or by the Philippine Stock Exchange. . ." In the instant case of redemption, there is no actual or constructive transfer of beneficial ownership of the preferred shares from NatSteel to another person. Upon redemption, the preferred shares will be surrendered to SteelAsia and the latter will not assign or transfer these shares to another person. Instead, SteelAsia will cancel these shares and no longer re-issue them. This being so, the subject redemption is exempt from DST under Section 4 of Revenue Regulations No. 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 concerned. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. Percentage of common (voting) shares held by NatSteel = Common (voting) shares held by NatSteel (20,000,000) Total common (voting) shares (50,000,000) = 40% 2. Entitled Implementing the Provisions of Republic Act No. 9243, An Act Rationalizing the Provisions on the Documentary Stamp Tax of the National Internal Revenue Code of 1997, as Amended, and for Other Purposes . n Note from the Publisher: Copied verbatim from the official document.