ITAD BIR Ruling No. 156-14

August 18, 2014 ITAD BIR RULING NO. 156-14 Article 10 (Dividend), Philippines-Italy tax treaty Ms. Arlene Singca 1225 Tanggile Street L & S Subdivision Barangay Sto. Domingo, Angeles City Madam : This refers to your tax treaty relief application ("TTRA") filed on July 23, 2012, requesting confirmation that dividends paid to Mr. Andrea Occhipinti ("Mr. Occhipinti") by O & G Leather Manufacturing Corporation ("O & G") are subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and to Prevent Fiscal Evasion ("Philippines-Italy tax treaty") . It is represented that Mr. Occhipinti is a resident of Italy based on the Certificate of Residence issued by the Agenzia Entrate of Italy on April 12, 2012; that Mr. Occhipinti is residing at No. 701 Via Cassia, Roma, Italia; that Mr. Occhipinti has no existing business name registered under his name with the Department of Trade and Industry Regional Office III based on the Certification issued by the same office on June 25, 2012; and that O & G, on the other hand, is a domestic corporation situated at Building 4A1-2 Philexcel Business Park, Clark Freeport Zone, Pampanga, Philippines. It is further represented that on May 28, 2012, the Board of Directors of O & G approved a declaration of cash dividends in the amount of P22,000,000.00 from its unrestricted retained earnings as of December 31, 2011 in favor of all stockholders on record of O & G of the same date, payable on or before June 30, 2013; that Mr. Occhipinti holds 20,000 shares constituting 5 percent of the outstanding capital stock of O & G. 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 Statement issued by the Corporate Secretary of O & G on July 9, 2012. 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 payable to Mr. Occhipinti , a nonresident alien individual not engaged in trade or business in the Philippines, are subject to income tax at the rate of 25 percent, thus: "Section 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Tax on Nonresident Alien Individual Not Engaged in Trade or Business within the Philippines . There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. . . ." IDTHcA However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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, you invoke the Philippines-Italy tax treaty. Paragraphs 1, 2, 3 and 4, Article 10 thereof provide: "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 fifteen per cent of the gross amount of the dividend. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 4. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to 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 aforequoted provisions, dividends arising in the Philippines and paid to a resident of Italy may be taxed in the Philippines at a rate not to exceed 15 percent of the gross amount of dividends. Accordingly, the dividends paid to Mr. Occhipinti by O & G are subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2, Article 10 of the Philippines-Italy tax treaty. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue