ITAD BIR Ruling No. 127-12

March 21, 2012 ITAD BIR RULING NO. 127-12 Article 11, Philippines-US Tax Treaty; BIR Ruling No. 058-84 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Ms. Veronica A. Santos Tax Division Gentlemen : This refers to your tax treaty relief application filed on January 4, 2010, on behalf of Goldman Sachs & Co. ("Goldman") , requesting confirmation that the dividend payments made by Ayala Land, Inc. ("Ayala") to Goldman are subject to 25 percent preferential tax rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income. ("Philippines-US tax treaty"). It is represented that Goldman , with address at 85 Broad Street, New York, New York, United States of America (US), is a resident of the US for purposes of US taxation based on the Certificate of Residency issued by the Internal Revenue Service dated January 26, 2009; that Goldman is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on December 23, 2009; and that, on the other hand, Ayala is a domestic corporation duly organized and existing under Philippine laws located at the 31/F, tower One, Ayala Triangle, Ayala Avenue, Makati City. It is also represented that at a meeting held on November 19, 2009, the Board of Directors of Ayala, per Resolution No. B-25-09, has approved the declaration of cash dividends of Php0.03 per common share corresponding to the second semester ending December 31, 2009, to all outstanding common shares of Ayala as of December 18, 2009, payable on January 19, 2010, and to direct the closure of the corporate books of Ayala for the transfer of shares from December 2009 to December 18, 2009. DHSCTI It is further represented, per Certification dated January 4, 2010 issued by Ayala, that as of December 18, 2009, the total outstanding shares of common stock (with par value of P1.00) of Ayala registered under the name of Goldman is 621,600 shares or 0.0048% of the issued and outstanding shares of Ayala. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on December 23, 2009, 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 Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code), 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. 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt or partially exempt from income tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: EHaCTA "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. xxx xxx xxx" With respect to a treaty, what you invoke for this purpose is the Philippines-US tax treaty. Its Article 11 provides: "Article 11 DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed (a) 25 percent of the gross amount of the dividend; or (b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation'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 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. aECSHI xxx xxx xxx 5. The term 'dividends' as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the US may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 25 percent of the gross amount of dividends; and (b) 20 percent if the corporation holds directly at least 10 percent of the outstanding shares of the voting stock of capital of the company paying the dividends. In view of the foregoing, since Goldman holds less than 10 percent of the outstanding shares of Ayala, this Office is of the opinion and so holds that the cash dividends to be received by Goldman from Ayala are subject to preferential tax rate of 25 percent of the gross amount of the dividends pursuant to Article 11 (2) (a) of the Philippines US tax treaty. (BIR Ruling No. 058-84 dated March 9, 1984) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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