ITAD BIR Ruling No. 143-15

May 4, 2015 ITAD BIR RULING NO. 143-15 Article 10, Philippines-US Tax Treaty Philippine Long Distance Telephone Company Ramon Cojuangco Building, Makati Avenue Makati City 1200 Attention: Ms. Charito R. Villena Tax Management Executive Gentlemen : This refers to your Tax Treaty Relief Application filed on September 13, 2011, on behalf of OFITC Emerging Markets Equity Fund ("OFITC"), requesting confirmation that the dividend paid by Philippine Long Distance Telephone Company ("PLDT") to OFITC is subject to 25 percent preferential tax rate 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-US tax treaty "). It is represented that OFITC, with office address 2 World Financial Center, New York, New York, U.S.A., is a corporation organized and existing under the laws of the United States (US) and is a resident of the US for purposes of US taxation, based on the Certificate of Residency issued by the Internal Revenue Service dated April 7, 2011; that OFITC 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 Securities and Exchange Commission dated December 1, 2011; and that PLDT, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with business address at Ramon Cojuangco Building, Makati Avenue, Makati City. It is further represented that on August 2, 2011, the Board of Directors of PLDT approved resolution to declare cash dividend of Seventy-eight Pesos (Php78.00) per outstanding share of common stock of PLDT to the stockholders of record as of August 31, 2011, payable on September 27, 2011 per Secretary's Certificate issued by PLDT on September 8, 2011; that as of August 31, 2011, OFITC is the beneficial holder of 24,780 common shares with total par value of Php59,224,200.00, representing 0.0133% ownership in PLDT; and that OFITC acquired the said shares in PLDT by purchase on various dates. It is finally represented, based on the Sworn Statement by PLDT on September 13, 2011, 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, rents, royalties . . . : 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" With respect to a treaty, what you invoke for this purpose is the Philippines-US tax treaty. Its Article 11 provides: "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. 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. 6. Nothing in this Convention (except Article 9 (Shipping and Air Transport)) shall be construed as preventing the Philippines from imposing on the earnings of a corporation (other than a Philippine corporation) attributable to a permanent establishment in the Philippines, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation, provided that any additional tax so imposed shall not exceed 20 percent of the amount of such earnings which have not been subjected to such additional tax in previous taxable years. For the purpose of this provision, the term "earnings" means business profits attributable to a permanent establishment in the Philippines in a year and previous years after deducting therefrom all taxes, other than the additional tax referred to herein, imposed on such profits by the Philippines. xxx xxx xxx" Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the US may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 25 percent of the gross amount of dividends; and (b) 20 percent if the corporation holds directly at least 10 percent of the outstanding shares of the voting stock of capital of the company paying the dividends. In view thereof and considering that OFITC is a US resident entity with no fixed place of business in the Philippines, which holds directly 0.0133 percent shareholdings in PLDT, said dividend paid by PLDT to OFITC is subject to 25 percent preferential tax rate, pursuant to Article 11 (2) (a) of Philippines-US tax treaty. 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