ITAD BIR Ruling No. 121-11

April 13, 2011 ITAD BIR RULING NO. 121-11 Article 9 (a), Philippines-United Kingdom Tax Treaty; BIR Ruling No. 239-82; BIR Ruling No. DA-ITAD-187-00; BIR Ruling No. DA-ITAD-093-07; BIR Ruling No. DA-ITAD-046-09 Ong Meneses Gonzalez & Gupit Law Offices 18th Floor, 88 Corporate Center 141 Valero corner Sedeo Streets Salcedo Village, Makati City 1227 Attention: Atty. Francisco B. Gonzalez V Tax Counsel Gentlemen : This refers to your letter dated May 24, 2010, on behalf of Instone International Limited ("Instone"), requesting confirmation that the cash dividends paid to Instone by Instone Philippines, Inc. ("Instone-Phils") are subject to the preferential tax rate of 15% as provided under the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty") . EHCaDS It is represented that Instone , with address at Regent House, Hubert Road, CM14 4JE Brentwood, United Kingdom, is a corporation duly organized and incorporated under the laws of the United Kingdom under Company No. 3514754 as certified by the Registrar of Companies of England and Wales on February 20, 1998; that Instone is not registered as a corporation or as partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 20, 2010; and that Instone-Phils , on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address located at 8th Floor, 1st E-Bank Building, 8783 Paseo de Roxas St., Makati City. It is further represented that at the special meeting the Board of Directors of Instone-Phils held on March 31, 2010, the Board declared cash dividends in the amount of One and Three Fourths (0.0175) United States cents per share or a total of Three Hundred Fifty Thousand US Dollars ($350,000.00) from its unrestricted retained earnings of US$773,850.00 in favor of stockholders of record of Instone-Phils as of December 31, 2009 and payable on or before May 30, 2010 as shown in the Secretary's Certificate issued by Instone-Phils dated June 16, 2010; that as of December 31, 2009, Instone owns 19,999,995 shares out of Instone-Phils' 20,000,000 shares, each share with a par value of Php1.00, or a total par value of Php19,999,995.00 as shown in the Secretary's Certificate issued by Instone-Phils dated May 25, 2010. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on July 27, 2010, that the transaction subject of the 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 of the taxpayer/s involved. In reply, please be informed that said dividends paid by Instone , being a nonresident foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30% under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, thus: "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 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 paragraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However the dividends may be exempt from income tax or partially exempt (if subject to a reduced rate only) to the extent required by any treaty obligation on the Philippines, Section 32 (B) (5) of the same Tax Code provides: "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: aSHAIC 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." In this particular case, you invoke the Philippines-UK tax treaty. Article 9 thereof, provides: "Article 9 DIVIDENDS 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company. 5. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on a trade or business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Article 7 or 13, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing provisions, dividends arising in the Philippines and paid to a resident of the United Kingdom may be taxed at a preferential rate not exceeding 15% of the gross amount of the dividends if the recipient is a company which controls directly or indirectly at least 10% of the voting power in the domestic company paying the dividends. In other cases, the preferential tax rate of 25% shall apply. This being the case, since Instone controls directly at least 10% of the voting power in Instone-Phils , being the holder of 99.99 percent (19,999,995 out of 20,000,000) of the outstanding common (voting) shares of Instone-Phils , such dividends paid to Instone are subject to income tax at the preferential tax rate of 15% based on the gross amount thereof. (BIR Ruling No. 239-82 dated August 25, 1982; BIR Ruling No. ITAD-187-00 dated December 7, 2000; BIR Ruling No. DA-ITAD 093-07 dated September 24, 2007; and BIR Ruling No. DA-ITAD 046-09 dated April 13, 2009) 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. CDScaT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue