ITAD BIR Ruling No. 160-15

June 2, 2015 ITAD BIR RULING NO. 160-15 Article 10 (Dividends), Philippines-France tax treaty, as amended Sanofi Pasteur, Inc . 4th Floor, Feliza Building 108 V.A. Rufino Street Makati City Attention: Gladys M. Solidum Tax Manager Gentlemen : This refers to your tax treaty relief application filed on November 26, 2014 requesting confirmation that dividends paid by Sanofi Pasteur, Inc. ( "Sanofi-Philippines" ) to Sanofi Pasteur S.A. ( "Sanofi Pasteur" ) are subject to preferential tax rate of 10 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income as amended by a Protocol 1 ("Philippines-France tax treaty, as amended") . It is represented that Sanofi Pasteur is a corporation organized and existing under the laws of France based on its Articles of Association; Sanofi Pasteur is a resident of France based on its Certificate of Residence for Tax Purposes issued by the Direction Gnrale Des Finances Publiques of France on September 23, 2014. It is not registered either as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on November 12, 2014. On the other hand, Sanofi-Philippines is a corporation organized and existing under the laws of the Philippines. It is also represented based on the Secretary's Certificate issued on November 18, 2014, Sanofi Pasteur holds 1,340,000 common shares of stock (including five qualifying shares) of Sanofi-Philippines which constitute 100% ownership in Sanofi-Philippines. It is further represented based on another Secretary's Certificate issued on November 18, 2014 that in a meeting of the Board of Directors of Sanofi-Philippines on November 10, 2014, the Board approved the declaration of cash dividends amounting to P10,000,000.00 to all stockholders of the Corporation as of the said date and payable on November 20, 2014. Finally, the issue or transaction subject of the above request for ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal per the Certification issued by Sanofi-Philippines dated November 26, 2014. Ruling In reply, please be informed that under Section 42 (A) (2) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividends are considered derived within the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." Thus, you invoke the provisions of Article 10 of the Philippines-France tax treaty, as amended which state: "Article 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other 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 law 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 recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends." Under Article 10, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the recipient is a company (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends; and (b) 15 percent in all other cases. Accordingly, since Sanofi Pasteur holds at least 10 percent of the voting shares of Sanofi-Philippines where it actually holds 100 percent of the common shares of Sanofi-Philippines , such dividends paid to Sanofi Pasteur by Sanofi-Philippines are subject to income tax rate of 10 percent , pursuant to paragraph 2 (a), Article 10 of the Philippines-France tax treaty, as amended. 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 Footnotes 1. Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic Signed on January 9, 1976 effective January 1, 1998. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.