ITAD BIR Ruling No. 170-11

June 22, 2011 ITAD BIR RULING NO. 170-11 Article 11, Philippines-US tax treaty; BIR Ruling No. ITAD 172-03; BIR Ruling No. ITAD 031-99; BIR Ruling No. 056-98; BIR Ruling No. ITAD 077-02 Sycip Gorres Velayo & Co. 6720 Ayala Avenue 1226 Makati City Attention: Antonette C. Tionko Gentlemen : This refers to your Tax Treaty Relief Application filed on July 1, 2010, on behalf of your clients, VANGUARD EMERGING MARKETS STOCK INDEX FUND ("Vanguard") and VANGUARD GLOBAL EQUITY FUND ("Vanguard Global") , requesting confirmation that the dividends to be paid to them by AYALA CORPORATION ("Ayala") are subject to the preferential tax rate of 25 percent pursuant to Article 11 of 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 Vanguard, with office address at 100 Vanguard Boulevard, Malvern, Pennsylvania, United States of America ("US"), is a resident of the US for purposes of taxation, under Tax Identification Number 23-2755204 as evidenced by the Certification issued by the Department of the Treasury, Internal Revenue Service dated February 16, 2010; that it 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 June 16, 2010. It is likewise represented that Vanguard Global, with office address at 100 Vanguard Boulevard, Malvern, Pennsylvania, USA, is a resident of the US for purposes of taxation under Tax Identification Number 23-2787275 as evidenced by the Certification issued by the Department of the Treasury Internal Revenue Service dated February 16, 2010; that it 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 June 16, 2010; and that, on the other hand, Ayala is a corporation duly organized and existing under the laws of the Philippines, with principal office at 34th Floor, Tower One, Ayala Triangle, Ayala Avenue, Makati. HSTAcI It is further represented that as of June 22, 2010, Vanguard and Vanguard Global are the beneficial owners of 2,527,886 and 2,18,913 n common shares, respectively, and that, the aforementioned shares represent .05194% and .04333% of the outstanding capital stock of Ayala , respectively, per Secretary's Certificate dated June 28, 2010; that at the regular meeting of the Board of Directors of Ayala held on June 2, 2010, it was resolved that a regular cash dividend for the first semester ending June 30, 2010, equivalent to Ayala's unappropriated retained earnings as of December 31, 2009, be distributed among Ayala's stockholders of record as of June 30, 2010, payable on July 16, 2010; and that, per Sworn Statement of Ayala dated June 28, 2010, the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim 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 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, . . .: 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" In this particular case, the treaty involve is the Philippines-US tax treaty, which, in 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 TCAScE 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. xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of USA at a rate not exceeding 20 percent of the gross amount dividends if more than 10 percent of the outstanding shares of the voting stock of the paying corporation, is owned by the income recipient during the part of the latter's taxable year which precedes the date of payment and during the whole of its prior taxable year. In all other cases, the 25 percent preferential tax rate shall apply. In view of the foregoing, since Vanguard and Vanguard Global own less than 10 percent of the outstanding capital stock of Ayala , the paying corporation, this Office is of the opinion and so holds that the cash dividends to be paid by Ayala to Vanguard and Vanguard Global are subject to the preferential rate of 25 percent withholding tax pursuant to Article 11 (2) (a) of the Philippines-USA tax treaty. (BIR Ruling No. ITAD 172-03 dated November 17, 2003; BIR Ruling 2003; n BIR Ruling No. ITAD 031-99 dated October 7, 1999; BIR Ruling No. 056-98 dated May 21, 1998; BIR Ruling No. ITAD 077-02 dated May 2, 2002) 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. ScCEIA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official copy.