ITAD BIR Ruling No. 125-12

March 21, 2012 ITAD BIR RULING NO. 125-12 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-037-10 The Purefoods-Hormel Co.,Inc. 21st Floor, JMT Building ADB Avenue, Ortigas Center Pasig City Attention: Celestino L. de Guzman AVP-Finance Manager Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on September 26, 2011 , requesting confirmation that dividends paid by The Purefoods-Hormel Co.,Inc. ("Purefoods") to Hormel Netherlands B.V. ("Hormel") are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that Hormel is a corporation organized and existing under the laws of The Netherlands with principal address at Locatellikade 1, 1076 AZ, Amsterdam, The Netherlands, and is a resident thereof within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued on January 31, 2011 by the Tax and Customs Administration of the Netherlands; that Hormel has an authorized capital divided into Two Hundred (200) shares each with a par value of One Thousand Dutch guilders (NLG1,000);that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated February 14, 2011; and that, on the other hand, Purefoods is a corporation organized and existing under the laws of the Philippines with principal address at 21st Floor, JMT Building, ADB Avenue, Ortigas Center, Pasig City. It is further represented that at the meeting of the Board of Directors of Purefoods held on November 15, 2011, a resolution was passed and approved declaring dividends amounting to Four Hundred Fifty Million Pesos (P450,000,000.00) in favor of its stockholders of record as of November 30, 2011, payable on December 5, 2011 ; that per the Corporate Secretary's Certificate issued by Purefoods dated December 12, 2011, that as of November 30, 2011, Hormel is the beneficial stockholder of 242,563,332 common shares equivalent to 40% capital stock of Purefoods. IcHTED It is finally represented per Secretary's Certificate issued by Purefoods on September 19, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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 income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 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 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. 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." In relation thereto, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, may apply to the instant case. It provides: TCacIA "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws 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 the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and 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. ..." Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, 15 percent preferential tax rate applies. Such being the case and considering that the capital of Hormel is wholly divided into shares, and that Hormel holds more than 10 percent of the capital of Purefoods, this Office is of the opinion and so holds that the dividend payments by Purefoods to Hormel shall be subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-037-10 dated September 16, 2010) SHADEC 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue