ITAD BIR Ruling No. 151-14

August 14, 2014 ITAD BIR RULING NO. 151-14 Article 10 (2) (a), Philippines-Austria tax treaty Managing Director TANN Philippines, Inc. First Philippine Industrial Park (FPIP) Barangay Sta. Anastacia, Santo Tomas Batangas 4234 Attention: Oliver Anthony S. Carsi Cruz Managing Director Gentlemen : This refers to your tax treaty relief application filed on August 12, 2013, requesting confirmation that dividend paid by TANN Philippines, Inc. ("TANN-Phil") to TANNPAPIER GmbH ("TANNPAPIER") is subject to preferential rate of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Austria tax treaty"). It is represented that TANNPAPIER, with address at 131 Johann-Roithner Strasse, 131 AT-4050 Traun Austria, is a corporation organized and existing under the laws of Austria, and is a resident of Austria within the meaning of the Philippines-Austria tax treaty per the Certificate of Residence issued by the Austrian Tax Administration dated May 27, 2013; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated May 21, 2013; and that, on the other hand, TANN-Phil is a corporation organized and existing under the laws of the Philippines, with principal address at First Philippine Industrial Park (FPIP), Barangay Sta. Anastacia, Santo Tomas, Batangas 4234. It is further represented, that at the meeting of the Board of Directors of TANN-Phil on July 15, 2013, a resolution was approved declaring cash dividends in the total amount of EUR4.2M (or the PESO or USD equivalent at the time of exchange) out of the unrestricted retained earnings of TANN-Phil as of December 31, 2012 to all stockholders, in proportion to their respective stockholdings as of such date, payable in three (3) installments, which are on or before: August 31, 2013, October 31, 2013 and December 31, 2013 respectively; that based on the Corporate Secretary's Certificate of TANN-Phil issued on August 6, 2013, TANNPAPIER owns 99.99% of the subscribed capital stock of TANN-Phil, and the said shareholdings were acquired by TANNPAPIER upon incorporation on February 28, 2002 and upon increase of capital stock on March 30, 2006; and that, the subject dividend were remitted by TANN-Phil to TANNPAPIER on August 22, 2013. EcDTIH It is finally represented, per Sworn Statement dated August 14, 2013 issued by TANN-Phil, that the issue or transaction subject of this request for 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. 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 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 on 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, 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. DcAEIS xxx xxx xxx" Thus, Article 10 of the Philippines-Austria tax treaty, which you invoke, may apply to the instant case. It 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 Contracting State. 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 Contracting 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 either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payments of the dividends; b) 25 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company with respect to the profits out of which the dividends are paid. 3. The term "dividends" as used in this Article means income from 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 laws of the Contracting State of which the company making the distribution is a resident. IHCSTE 4. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to 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 either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payments of the dividends; and (b) 25 percent of the gross amount of the dividends, in all other cases. In view thereof, considering that TANNPAPIER is a resident of Austria with no fixed place of business in the Philippines, and holds 99.99% of the subscribed capital stock of TANN-Phil for more than six months immediately preceding the date of payment of the dividend or since March 30, 2006, the dividend paid by TANN-Phil to TANNPAPIER is subject to the preferential tax rate of not exceeding 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Austria 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. cSTDIC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue