ITAD BIR Ruling No. 130-15

May 4, 2015 ITAD BIR RULING NO. 130-15 Article 10, Philippines-Malaysia tax treaty KRM Reinsurance Brokers Phils., Inc. Suite 1804, 88 Corporate Center Sedeo Street, Salcedo Village Makati City Attention: Mr. Joselito S. Villamil Vice President & General Manager Gentlemen : This refers to your tax treaty relief application filed on January 30, 2015, requesting confirmation that dividend paid to JAB Capital Berhad ("JAB") by KRM Reinsurance Brokers Philippines Incorporated ("KRM") is subject to a preferential tax rate of 15 percent pursuant to the Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Malaysia tax treaty"). It is represented that JAB is a foreign corporation organized and existing under the laws of Malaysia and is a resident thereof based on the Certificate of Residence issued by Inland Revenue Board of Malaysia on April 28, 2014; that JAB is situated at 15th Floor, UBN Tower, 10 Jalan P. Ramlee, 50250 KL Malaysia; that JAB is not registered as corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by Securities and Exchange Commission ("SEC") on June 26, 2014; and that, on the other hand, KRM is a domestic corporation situated at Suite 1804, 88 Corporate Center, Sedeo corner Valero Streets, Salcedo Village, Makati City, Philippines. It is further represented, that on April 24, 2014, the Board of Directors of KRM, at its meeting, declared an interim dividend out of its unrestricted retained earnings as of December 31, 2013 in the aggregate amount of PhP61,000,000.00 to all stockholders of record as of April 15, 2014 and shall be payable on or before December 31, 2014; and that JAB is the legal and beneficial owner of 479,996 shares constituting 99.99 percent of the entire stockholdings of KRM with a total par value of PhP47,999,600.00. It is finally represented that the dividend subject of this 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, based on the Affidavit issued by the Vice President & General Manager of KRM on February 2, 2015. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that dividend paid to JAB, being a foreign corporation not engaged in trade or business in the Philippines, is subject to income tax at the rate of 30 percent, thus: "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 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): 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 Code provides that such dividend may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, 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. xxx xxx xxx" With respect to a tax treaty, you invoke the Philippines-Malaysia tax treaty. Paragraphs 1, 2, and 3, Article 10 thereof provide: " 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. Dividends paid by a company which is a resident of the Philippines to a resident of Malaysia who is subject to tax in Malaysia in respect thereof, may be taxed in the Philippines in accordance with the laws of the Philippines 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; b) in all other cases, 25 per cent of the gross amount of the dividends. 3. Dividends paid by a company which is a resident of Malaysia to a resident of the Philippines who is the beneficial owner thereof and is subject to Philippine tax in respect thereof shall be exempt from any tax in Malaysia which is chargeable on dividends in addition to the tax chargeable in respect of the income of the company: Provided that nothing in this paragraph shall affect the provisions of the Malaysian law under which the tax in respect of a dividend paid by a company which is a resident of Malaysia from which Malaysian tax has been, or has been deemed to be, deducted may be adjusted by reference to the rate of tax appropriate to the Malaysian year of assessment immediately following that in which the dividend was paid. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines paid to a resident of Malaysia may be taxed in the Philippines at a rate not to exceed: (a) 15 percent of the gross amount of dividends if the recipient is a company; and (b) 25 percent of the gross amount of the dividends in all other cases. Accordingly, considering that JAB is a company which is a resident of Malaysia, the dividend paid by KRM to JAB is subject to income tax at the reduced rate of 15 percent of the gross amount thereof , pursuant to paragraph 2(a), Article 10 of the Philippines-Malaysia 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