ITAD BIR Ruling No. 172-14

September 18, 2014 ITAD BIR RULING NO. 172-14 Article 10 (Dividend), Philippines-Netherlands tax treaty Manabat Sanagustin & Co., CPAs 9th Floor The KPMG Center 6787 Ayala Avenue, Makati City Attention: Ma. Georgina J. Soberano Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on April 13, 2013, on behalf of HORMEL NETHERLANDS B.V. ("HORMEL"), requesting confirmation that dividends paid by PUREFOODS-HORMEL CO. INC., ("PUREFOODS-HORMEL") to HORMEL are subject to income tax at a preferential rate of 10 percent pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that HORMEL is a foreign corporation organized and existing under the laws of the Netherlands and is a resident of the Netherlands, based on its Articles of Association, and on the Certificate of Residency issued by the Tax and Customs Administration of Kantoor Rotterdam in The Netherlands on March 26, 2013; that HORMEL has an authorized capital of NLG200,000 and is divided into 200 shares with a par value of NLG1,000; that HORMEL is situated at Herikerbergweg 238-Luna Arena, 1101 CM Amsterdam Zuidoost, The Netherlands; that HORMEL is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on April 5, 2013; and that, on the other hand, PUREFOODS-HORMEL is a domestic corporation situated at 21st Floor JMT Corporate Condominium, ADB Avenue, Ortigas Center, Pasig City, Philippines. It is further represented that the Board of Directors of PUREFOODS-HORMEL, in its special meeting on March 7, 2013, declared cash dividends in the amount of P1,500,000,000.00 in favor of all stockholders of record of PUREFOODS-HORMEL, payable on May 31, 2013; that HORMEL is the legal owner of 242,563,332 common shares which represent 40 percent of the total shares of PUREFOODS-HORMEL as evidenced by the Secretary's Certificate dated April 19, 2013; and that the said dividends were paid on June 17, 2013 to HORMEL as shown in the Certification issued by The Hongkong and Shanghai Banking Corporation Limited (HSBC) on June 21, 2013. ScTCIE 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 Finance Manager of PUREFOODS-HORMEL on March 26, 2013. 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 HORMEL, a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 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. HISAET xxx xxx xxx" With respect to a treaty, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: "Article 10 Dividends 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the 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 recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, inasmuch as HORMEL, the recipient of the dividends from PUREFOODS-HORMEL, is a company in the Netherlands whose capital is wholly divided into shares, and since HORMEL holds directly at least 10 percent (in fact, 40 percent) of the capital of PUREFOODS-HORMEL, such dividends paid by PUREFOODS-HORMEL to HORMEL are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. SDTcAH 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