ITAD BIR Ruling No. 119-11

April 11, 2011 ITAD BIR RULING NO. 119-11 Article 10, Philippines-Malaysia tax treaty ISC Consolsys Corporation Unit 26A, 26F Chatham House Condominium 116 Valero corner Rufino Streets Salcedo Village, Makati City Attention: Ms. Maribel Bacay Finance and Administrative Officer Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on February 7, 2011, on behalf of Consolsys SDN BHD ("Consolsys") requesting confirmation that the dividends paid by ISC Consolsys Corporation ("ICC") to Consolsys are subject to final withholding tax at the preferential rate of 15 percent, pursuant to Article 10 of 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 Consolsys, with address at 9/F Menara Getah Asli, 148 Jalan Ampang, 50450 Kuala Lumpur, Malaysia, is a corporation organized and existing under the laws of Malaysia, and is a resident of Malaysia per the Certificate of Status of Tax Residence for the Year of Assessment 2010 issued by the Principal Assistant District Director, Department of International Taxation, Inland Revenue Board of Malaysia dated December 30, 2010; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated January 27, 2011; and that, on the other hand, ICC is a corporation organized and existing under the laws of the Philippines with principal address at Unit 26A, 26F Chatham House Condo. 116 Valero corner V.A. Rufino Streets, Salcedo Village, Makati City. It is further represented that, per Secretary's Certificate issued by ICC on December 21, 2010, Consolsys holds 55,000 shares which represent 100% ownership in ICC as of December 31, 2009 and December 31, 2010; that during the Regular Board Meeting of ICC on December 21, 2010, the board declared cash dividend to be distributed to stockholders of ICC and that the cut-off date for the distribution of cash dividend shall be on December 31, 2009 and to be paid on or before May 2011. It is finally represented, per the notarized Certification issued by ICC dated December 22, 2010, 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 proceeding, or judicial appeal. CSIcTa 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 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." Thus, the provisions of Article 10 of the Philippines-Malaysia tax treaty, which you invoke, may apply to the instant case. It states: "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. 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. cCAIES 3. Dividends paid by a company which is a resident of Malaysia to a resident of the Philippines who is the beneficial owner thereof and is subject to Philippine tax in respect thereof shall be exempt from any tax in Malaysia which is chargeable on dividends in addition to the tax chargeable in respect of the income of the company: Provided that nothing in this paragraph shall affect the provisions of the Malaysian law under which the tax in respect of a dividend paid by a company which is a resident of Malaysia from which Malaysian tax has been, or has been deemed to be, deducted may be adjusted by reference to the rate of tax appropriate to the Malaysian year of assessment immediately following that in which the dividend was paid. xxx xxx xxx 6. The term "dividends" as used in this Article means income from shares or other rights (not being debt-claims) participating in income or profits, as well as income from other corporate rights assimilated to income from shares according to the taxation laws of the Contracting State of which the company making the distribution is a resident." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Malaysia at a rate not exceeding 15 percent of the gross amount of the dividends if the recipient is a company; and 25 percent of the gross amount of the dividends in all other cases thereof. In view thereof and considering that Consolsys is a company which is a resident of Malaysia and holds 100% of the shareholdings in ICC, the dividends paid by ICC to Consolsys are subject to 15 percent preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Malaysia tax treaty. This ruling is issued on the basis of the foregoing 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. cETDIA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue