ITAD BIR Ruling No. 128-15

May 4, 2015 ITAD BIR RULING NO. 128-15 Article 10 Philippines-Netherlands tax treaty Salvador & Associates Attorneys-at-Law 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty. Maria Rosario L. Bernardo Gentlemen : This refers to your tax treaty relief application filed on August 13, 2014 requesting confirmation on your opinion that the dividend paid by McCann Worldgroup Philippines, Inc. (" McCann-PH ") to IPG Nederland B.V. ("IPG-NL") are subject to preferential tax rate pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (" Philippines-Netherlands tax treaty "). Facts IPG-NL is a foreign corporation and a resident of the Netherlands based on its Articles of Association and the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on July 2, 2014. IPG-NL is located at Luna Arena, Herikerbergweg 238, CM 1101 Amsterdam, the Netherlands. IPG-NL is a company with a nominal value of share of 454 euros. It is not registered as a corporation or partnership in the Philippines based on the Certification on Non-Registration of Company issued by the Securities and Exchange Commission on March 28, 2014. On the other hand, McCann-PH is a domestic corporation located at 5th Floor, Active Fun Building, 9th Avenue corner 28 Street, Bonifacio Global City, Taguig, Philippines. Based on the Secretary's Certificates issued on May 28, 2014, the Board of Directors of McCann-PH , during a special meeting on March 21, 2014, approved a resolution declaring cash dividends amounting to P106,910,596.00 in favor of the company's stockholders of record as of April 15, 2014, and payable on October 31, 2014. As of August 6, 2014, IPG-NL owns 3,000,000 common shares of stock of McCann-PH , each share with a par value of P1.00, which constitute 30 percent ownership on the total issued and outstanding shares of stock of McCann-PH . Finally, the dividends subject of the request are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on Certification issued by the AVP-Finance and Admin of McCann-PH on April 22, 2014. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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 interests, 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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: 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-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: " 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." Based on the abovementioned provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends, and 15 percent in all other cases. Accordingly, since IPG-NL is a company in the Netherlands the capital of which is wholly divided into shares, and that IPG-NL holds directly at least 10 percent of the capital of McCann-PH (as represented by shares) and where IPG-NL holds 30 percent of these shares, such dividend paid by McCann-PH to IPG-NL shall be subject to income tax rate of 10 percent , pursuant to paragraph 2(a), Article 10 of the Philippines-Netherlands tax treaty. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.