ITAD BIR Ruling No. 173-11

June 22, 2011 ITAD BIR RULING NO. 173-11 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-81-10 Castillo Laman Tan Pantaleon & San Jose 4/F The Valero Tower, 122 Valero Street Salcedo Village, Makati City 1227 Attention: J. Gregson A. Castillo Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 20, 2011, on behalf of your client, Seven-Up Nederland B.V. ("Seven-Up") , requesting confirmation that dividend payments of Pepsi-Cola Far East Trade Development Co., Inc. ("Pepsi-Cola") to Seven-Up are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands 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 Seven-Up, with address at Zonnebaan 35, 3542 EB Utrecht, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty, per the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands on March 30, 2011; that it is a corporation organized and existing under the laws of the Netherlands with an authorized capital of one billion euro (EUR1,000,000,000), and is divided into one billion (1,000,000,000) shares, each with a par value of one euro (EUR 1); that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 12, 2011; and that, on the other hand, Pepsi-Cola is a corporation organized and existing under the laws of the Philippines with principal address at No. 3 Fusion Street, Light Industry and Science Park, Barrio Diezmo, Cabuyao, Laguna. DEaCSA It is further represented that per Secretary's Certificate issued by Pepsi-Cola dated April 15, 2011, Seven-Up holds 129,524 shares in Pepsi-Cola with a par value of PhP12,952,400.00 and which represent 100% of the outstanding capital stock of Pepsi-Cola as of the date of payment of the subject dividends; that at a special meeting of the Board of Directors of Pepsi-Cola held on April 15, 2011, the Board of Directors approved a resolution which authorizes the declaration of cash dividends in the total amount of Forty-Four Million Pesos (Php44,000,000) out of Pepsi-Cola's unrestricted retained earnings in favor of the stockholders of record, payable on or before April 29, 2011. It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal per sworn statement issued by Pepsi-Cola dated April 19, 2011. 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 income derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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%)." AECcTS 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-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides: "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. SHAcID xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident." Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not 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 Seven-Up is a private company in the Netherlands, the capital of which is wholly divided into shares and since Seven-Up holds 100 percent of the capital of Pepsi-Cola (which is actually more than the required minimum shareholding of 10 percent to avail of the 10 percent preferential rate), such dividends to be paid by Pepsi-Cola to Seven-Up are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-81-10 dated December 20, 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. EcTIDA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue