ITAD BIR Ruling No. 155-11

May 19, 2011 ITAD BIR RULING NO. 155-11 Article 10, Philippines-Switzerland tax treaty; BIR Ruling No. ITAD-009-10 Philip Morris Philippines Manufacturing, Inc. 27th Floor, Tower 1, The Enterprise Center Ayala Avenue, Makati City MCC P.O. Box 2338 Attention: Stella G. Calayag Tax Manager Gentlemen : This refers to your Tax Treaty Relief Application filed on May 12, 2010, requesting confirmation that the dividends paid by Orecla Realty, Inc. ("ORI") to Orecla Sarl ("Orecla") are subject to the preferential tax rate of 10 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Swiss Federation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that Orecla is a corporation organized and existing under the laws of Switzerland with principal address at Chemin de Brillancourt 4, 1006 Lausanne, Switzerland per Certificate issued by the Fiscaliste of the Administration Cantonale des Impts on March 19, 2010; that it is not registered either as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated March 18, 2010; and that, on the other hand, ORI is a corporation organized and existing under the laws of the Philippines with principal address at 27th Floor, The Enterprise, Paseo de Roxas corner Ayala Avenue, Makati City. It is further represented, per Secretary's Certificate issued by ORI on November 15, 2010, that Orecla is a stockholder of ORI with a shareholding of 99,998 common shares with a par value of PhP99,998.00 constituting 39.9992% of the shareholdings of ORI as of February 28, 2010; that on February 22, 2010, the Board of Directors of ORI unanimously resolved to declare cash dividends in favor of its common shareholders in the amount of One Hundred Ninety-Five Million Eight Hundred Thirty-Two Thousand Eight Hundred Seventy-Three Pesos (PhP195,832,873.00), from ORI's retained earnings as of February 28, 2010, payable to ORI's common shareholders of record as of March 31, 2010. HEITAD It is finally represented 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 per certification issued by ORI dated December 28, 2010. 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 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, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides: "Section 32. Gross Income. (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." Thus, the provisions of Article 10 of the Philippines-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides: "Article 10 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 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 (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. IDScTE 3. The term 'dividends' as used in this Article means income from 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 that State of which the company making the distribution is a resident." Based on the aforequoted provisions of Article 10, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation; and 15 percent if the shareholdings of the recipient company is below 10 percent of the capital of the paying company. In view thereof, since Orecla directly owns more than 10 percent of the capital stock of ORI, this Office is of the opinion and so holds that the dividend payments by ORI to Orecla are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD-009-10 dated June 3, 2010) 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. HcTIDC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue