ITAD BIR Ruling No. 122-13

April 25, 2013 ITAD BIR RULING NO. 122-13 Article 10, Philippines-France tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Veronica A. Santos Principal, Transaction Tax Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on June 1, 2012, on behalf of your client, BNP Paribas Arbitrage SNC ("BNP") , requesting confirmation that the dividend payments of SM Investments Corporation ("SMIC") to BNP are subject to final withholding tax at the preferential rate of 15 percent pursuant to Article 10 (2) (b) of the amended Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty, as amended") . aTAEHc Facts It is represented that BNP is a corporation organized and existing under the laws of France with principal address at 8, rue de Sofia, 75018 Paris, France per the Certificate of Residence issued by the Direction Generale Des Finances Publiques of France on March 21, 2011; that BNP is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated March 24, 2011; and that, on the other hand, SMIC is a corporation organized and existing under the laws of the Philippines with principal office address at 10th Floor, One E-Com Center, Harbor Drive, Mall of Asia Complex, CBP-1A, Pasay City, Philippines. It is further represented, per the Secretary's Certificate issued by SMIC on September 21, 2012, that at the regular meeting of its Board of Directors held on April 26, 2012, the Board declared a cash dividends totaling P6.367 million or equivalent to 30% of 2011 consolidated net income or P10.40 per share or 104.0% cash dividends based on par value of all stockholders of record as of May 16, 2012 and payable on June 21, 2012; that per the same Secretary's Certificate issued by SMIC, HSBC Securities Services ("HSBC"), custodian of various non-resident foreign shareholders of SMIC certifies that BNP is the beneficial holder of the SMIC's common shares as of May 26, 2012; that per the duly notarized Certification issued by the Vice President of HSBC on September 5, 2012, as of record date, BNP is the beneficial holder of 365,430 common shares valued at Php806,761,029.00 constituting 0.059535% ownership in SMIC; and that per notarized confirmation letter issued by HSBC, BNP dividend income was remitted dated June 21, 2012. It is finally represented, per the Sworn Statement issued by SMIC on September 21, 2012, 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 proceeding, or judicial appeal. Ruling 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 received by a nonresident foreign corporation. It provides: TEacSA "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, Article 10 of the Philippines-France tax treaty, as amended, which you invoke, may apply to the instant case. 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. CDESIA 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) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident." xxx xxx xxx Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines, but the rate of income tax that may be imposed thereon shall not exceed (a) 10 percent of the gross amount of the dividends if the recipient company (excluding partnership) holds directly at least 10 percent of the voting shares of the company paying the dividends, and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since BNP only holds 0.059535% of the total shares of stock of SMIC, this Office is of the opinion and so holds that the dividend payment of SMIC to BNP shall be subject to the preferential withholding tax at the rate of 15 percent of the gross amount of the thereof, pursuant to Article 10 (2) (a) of the Philippines-France tax treaty, as amended. 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. ICacDE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue