ITAD BIR Ruling No. 140-11

May 2, 2011 ITAD BIR RULING NO. 140-11 Article 10 (2) (a) Philippines-France tax treaty; BIR Ruling No. ITAD 017-01; BIR Ruling No. ITAD 034-10; BIR Ruling No. DA-ITAD-101-04 Tam-Yap Caga & Associates Unit B, 15th Floor, ACT Tower, 135 H.V. de la Costa Street, Salcedo Village Makati City, Philippines Attention: Teresa R. Tam-Yap Maria Graciela B. Suratos Mesdames : This refers to your tax treaty relief application ("TTRA") filed on March 18, 2011 requesting confirmation that the withholding tax rate on the dividends paid to Egis Road Operation S.A. ("ERO S.A.") by Tollways Management Corporation ("TMC") is 10 percent pursuant to Article 10 (2) (a) of the amended Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ("Philippines-France tax treaty, as amended") . It is represented that ERO S.A. is a corporation duly organized and existing under the laws of France with principal business address at 11 Avenue du Centre 78 280 Guyancourt; that it is a fiscal resident in France for purposes of taxation as certified by the Tax Inspector of the Major Accounts Department of the General Department of Public Finance of France on January 3, 2011; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission on January 31, 2011; and that TMC, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with office address at Km. 12 North Luzon Expressway, Balintawak, Quezon City, Philippines. It is further represented that on February 22, 2011 the Board of Directors of TMC approved the declaration of cash dividends in the aggregate amount of Two Hundred Four Million One Hundred Fourteen Thousand Six Hundred Fifty-five Pesos (PhP204,114,655.00) or Five Hundred Thirty-seven 14/100 Pesos (PhP537.14) per share, in favor of all its stockholders of record as of February 22, 2011, payable on March 31, 2011; that as per certification issued by the Corporate Secretary of TMC, ERO S.A. holds 129,200 common shares constituting 34% of the issued and outstanding shares of TMC as of record date; and that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by the Chief Financial Officer of TMC on March 4, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: TEcAHI "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 interest, 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%)." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It 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." Hence, the provisions of Article 10 of the Philippines-France tax treaty, as amended, which you invoked, may apply. It states: "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) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; ACcDEa b) In all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the foregoing provisions, the Philippines may tax the dividends paid by a resident company to a company which is a resident of France at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividends. In view thereof, considering that ERO S.A., being the beneficial owner/recipient of the subject dividends, owns 34% of the total outstanding stocks of TMC as of record date, which is more than the required shareholding of 10 percent, this Office is of the opinion, and hereby holds, that the dividends payable to ERO S.A. by TMC shall be subject to a preferential tax rate of 10 percent of the gross amount of the dividends, pursuant to the Philippines-France tax treaty, as amended. (BIR Ruling No. ITAD 017-01 dated February 19, 2001; BIR Ruling No. ITAD 034-10 dated September 14, 2010; BIR Ruling No. DA-ITAD 101-04 dated September 13, 2004) . This ruling is issued on the basis of the foregoing 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