ITAD BIR Ruling No. 143-11

May 2, 2011 ITAD BIR RULING NO. 143-11 Article 10, Philippines-China tax treaty; BIR Ruling No. ITAD 47-11 Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City, Taguig City Attention: Atty. Dennis G. Dimagiba Atty. Maria Ana Camila C. Jacinto Gentlemen : This refers to your letter dated July 1, 2010, requesting confirmation that dividends paid by AYALA CORPORATION ("AYALA") to BEST INVESTMENT CORPORATION ("BEST INVESTMENT") are subject to a preferential tax rate of 15 percent pursuant to Article 10 of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-China tax treaty") . It is represented that BEST INVESTMENT is a resident corporation of China based on the Certificate of Chinese Fiscal Resident issued by the Xicheng District Office of the State Administrative of Taxation of China on March 3, 2010; that BEST INVESTMENT is situated at Suite 936, No. 2 Building, No. 1 Complex, Nao Shi Kou Da Jie, Xicheng District, Beijing, China; that BEST INVESTMENT is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on December 23, 2009; and that, on the other hand, AYALA is a domestic corporation situated at 34th Floor, Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City, Philippines. It is further represented that on June 2, 2010, the Board of Directors of AYALA, at its regular meeting, approved Resolution No. B-13-10 authorizing the declaration of regular cash dividends for the first semester of 2010, ending on June 30, 2010, to all common stockholders of AYALA as of that date, based on the Certificate issued by the Assistant Corporate Secretary of AYALA on June 25, 2010; that the dividend will be taken out of the unappropriated retained earnings of AYALA as of December 31, 2009, and payable on July 16, 2010; and that as of June 22, 2010, the number of common shares of stock (with par value of P50.00) held by BEST INVESTMENT is 517,860, or 0.1064 percent of the total and outstanding common shares of AYALA, based on the Certificate issued by the same Assistant Corporate Secretary on June 28, 2010. It is finally represented that the dividends subject of this ruling 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 the Sworn Certification issued by the same Assistant Corporate Secretary on June 22, 2010. HDTcEI In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to BEST INVESTMENT, being a foreign corporation not engaged in trade or business in the Philippines, are 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 dividends may be exempt 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" In this particular case, you invoke the Philippines-China tax treaty. Article 10 thereof 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. STIHaE 2. However, such dividends may also be taxed in the Contracting 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 beneficial owner is a company 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. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid a resident of China may be taxed in the Philippines at a rate not exceeding (a) 10 percent of the gross amount of the dividends if the company who is the beneficial owner of the dividends which holds directly at least 10 percent of the capital of the company paying the dividends, and (b) 15 percent of the gross amount of the dividends in all other cases. In view of the foregoing, this Office is of the opinion and so holds that since BEST INVESTMENT, being the recipient of the dividends, holds directly only 0.1064 percent of the capital of AYALA, as represented by the number of its outstanding common shares of stock issued, dividends paid by AYALA to BEST INVESTMENT are subject to income tax at the rate of 15 percent of the gross amount thereof. (BIR Ruling No. ITAD 47-11 dated February 11, 2011) 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. IDASHa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue