ITAD BIR Ruling No. 129-13

May 8, 2013 ITAD BIR RULING NO. 129-13 Article 10, Philippines-Singapore tax treaty Roxas De Los Reyes Laurel Rosario & Leagogo Law Offices 19/F BDO Plaza, 8737 Paseo de Roxas Makati City, 1226 Attention: Atty. Mcdonald G. Abalos Representative Gentlemen : This refers to your tax Treaty Relief Application ("TTRA") filed on April 27, 2012, on behalf of Micro-Mechanics (Holdings) Ltd. ("Micro-Mechanics") , requesting confirmation that dividend payment made by Micro-Mechanics Technology International, Inc. ("Micro-Technology") to Micro-Mechanics is subject to 15 percent preferential tax rate pursuant to the Convention between The Republic of the Philippines and The Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . It is represented that Micro-Mechanics , with address at 31 Kaki Bukit Place, Eunos Techpark, Singapore, is a resident of Singapore under the provisions of the Philippines-Singapore tax treaty per Certificate of Residence issued by the Inland Revenue Authority of Singapore dated February 7, 2012; that Micro-Mechanics 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 March 14, 2012; and that, on the other hand, Micro-Technology is a domestic corporation duly organized and existing under Philippine laws, located at the Lot B2-1C Carmelray Industrial Park II, Brgy. Tulo, Calamba, Laguna. It is also represented, per Secretary's Certificate dated April 17, 2012, that Micro-Mechanics is the legal and beneficial owner of 85,395 common shares of the 85,400 outstanding shares of stock of Micro-Technology, with a par value of Php100.00 per share, consisting of 99.99% of the issued and outstanding capital stock of Micro-Technology ; that these shares were acquired by Micro-Mechanics in 2008 through subscription; that on March 2, 2012, the Board of Directors of Micro-Technology declared cash dividend in the amount of Thirty-Two Million Three Hundred Thousand Pesos (P32,300,000.00) in favor of all shareholders of Micro-Technology ; and that the said dividend was paid to Micro-Mechanics on May 3, 2012 as evidenced by the telegraphic transfer transaction advice of DBS Bank. HAaDcS It is finally represented, based on the Sworn Statement by Micro-Mechanics on March 12, 2012, 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 of 1997), 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 to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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. aTHCSE xxx xxx xxx" Thus, Article 10 of the Philippines-Singapore tax treaty 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. 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) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company'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 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. TIDaCE 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue 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 Article 14, as the case may be, shall apply. 6. Where a company which is a resident of a Contracting State derived profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company to persons who are resident of that State, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits even if the dividends paid or undistributed profits consist wholly or partly of profits or income arising in such other State." Based on the aforequoted provisions, the Philippines may tax the dividends paid by its resident to a resident of Singapore at a rate not exceeding 15 percent if the recipient is a company, and during the part of the payor's taxable year which precedes the date of payment of the dividend, and, during the whole of the payor's prior taxable year, at least 15 percent of the outstanding shares of the voting stock of the paying company were owned by the recipient, and 25 percent in all other cases. In view of the foregoing and since Micro-Mechanics holds 99.99% of the total outstanding shares of stock of Micro-Technology since 1989 up to the present, the dividend paid to it by Micro-Technology is subject to income tax in the Philippines at the rate of 15 percent based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Singapore 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. CHEIcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue