ITAD BIR Ruling No. 131-11

April 19, 2011 ITAD BIR RULING NO. 131-11 Article 11, Philippines-United States tax treaty; BIR Ruling No. 141-95; BIR Ruling No. ITAD-39-10 Connel Bros. Company Pilipinas, Inc. 3/F Prudential Building 31 EDSA Mandaluyong Attention: Ms. Teresita C. Flores Representative Gentlemen : This refers to your tax treaty relief application filed on June 22, 2010, on behalf of WILBUR-ELLIS COMPANY ("WEC"), with respect to its dividend income received from CONNEL BROS. COMPANY PILIPINAS, INC. ("CBCPI"), 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-United States tax treaty") . It is represented that WEC, with office address at 345 California Street, 27th Floor, San Francisco, CA 94104, is a corporation duly organized and existing under the laws of the State of California, United States of America as evidenced by its Amended and Restated Articles of Incorporation; that it is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission (SEC) on May 26, 2010; that, on the other hand, CBCPI is a corporation duly organized and existing under Philippine laws, with office address at 3rd Floor Prudentialife Building 31 EDSA Mandaluyong City 1550; and that based on the May 6, 2010 and the February 3, 2011 Certifications, both executed by the Corporate Secretary of CBCPI and, further, the General Information Sheet of CBCPI, there are 133,495 common shares in CBCPI, equivalent to Php13,349,500.00 subscribed and paid by WEC since November 18, 1995, and that said shares constitute 99.99% ownership of WEC in CBCPI. It is further represented, based on the Secretary's Certificate issued by CBCPI on May 6, 2010, that at the special meeting of CBCPI's Board of Directors on April 22, 2010, the Board approved a resolution declaring a cash dividend of Php510.00 per share, or a total amount of Php68.085 Million, out of the unrestricted retained earnings of CBCPI as of December 31, 2009 in favor of all stockholders of record of CBCPI as of May 18, 2010, payable by May 25, 2010; and that, finally, per the Affidavit executed by CBCPI on November 22, 2010, the transaction subject of the herein 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 a judicial appeal of the taxpayers involved. cHaDIA 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 dividend 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 . . ., 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: "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" In the instant case, the treaty being invoked is the Philippines-United States tax treaty. Its Article 11 provides, viz. : "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. AHCETa 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. 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 provisions, the Philippines may tax the dividends paid by a Philippine company to a United States resident company at a rate not exceeding 20 percent if the said United States company owns at least 10 percent shares of the voting stock of the said Philippine company. In view of the foregoing, considering that WEC owns 99.99% common shares in CBCPI, an amount which is more than the required 10 percent shareholding, during CBCPI's taxable year which precedes the date of payment of the dividend on May 25, 2010 and during the whole of its prior taxable year, this Office is of the opinion and so holds that the dividend payment of CBCPI to WEC is subject to the preferential tax rate of 20 percent of the gross amount thereof, pursuant to Article 11 (2) (b) of the Philippines-United States tax treaty. (BIR Ruling No. 141-95 dated September 12, 1995; BIR Ruling No. ITAD-39-10 dated September 21, 2010) 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. AIaSTE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue