ITAD BIR Ruling No. 173-15

June 2, 2015 ITAD BIR RULING NO. 173-15 Article 9 (Dividend), Philippines-United Kingdom of Great Britain and Northern Ireland tax treaty Salvador & Associates Attorneys-at-Law Rooms 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue 1226 Makati City Attention: Maria Rosario L. Bernardo Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 24, 2014, requesting confirmation that dividend paid to HSBC Global Operations Company Limited ("HSBC") by HSBC Electronic Data Processing ( Philippines ), Inc. (" HSBC-Philippines ") is subject to income tax at a preferential rate of 15 percent pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (" Philippines-UK tax treaty "). It is represented that HSBC is a corporation duly organized and existing under the laws of United Kingdom of Great Britain and is a resident thereof based on its Articles of Association and on the Certificate of Residence issued by the HM Revenue & Customs on July 22, 2014; that HSBC 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 August 29, 2014; and that HSBC-Philippines , on the other hand, is a domestic corporation organized and existing under the laws of the Philippines. It is further represented that the Board of Directors of HSBC-Philippines , at its special meeting on September 16, 2014, declared cash dividend of P1,135,052,578.00 out of its unrestricted retained earnings, in favor of all stockholders of record of HSBC-Philippines as of December 31, 2013, to be paid anytime in the Fourth Quarter of 2014; and that HSBC holds 13,911,097 common shares and 7,311,097 redeemable shares constituting 100 percent of the issued and outstanding shares of HSBC-Philippines since June 5, 2006. It is finally represented that the dividend subject of this ruling is 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 Head of Finance of HSBC-Philippines on September 24, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, provides that dividend payable to HSBC, a foreign corporation not engaged in trade or business in the Philippines, is 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 dividend 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-UK tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: " Article 9 Dividends 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. 2. Dividends derived from a company which is a resident of the United Kingdom by a resident of the Philippines may be taxed in the Philippines. Such dividends may also be taxed in the United Kingdom and according to the laws of the United Kingdom, but where such dividends are beneficially owned by a resident of the Philippines the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of UK may be taxed in the Philippines at a rate not to exceed: (a) 15 percent of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 percent of the voting power in the company paying the dividends; and (b) 25 percent of the gross amount of the dividends in all other cases. Accordingly, since HSBC holds directly 100 percent of the voting power of HSBC-Philippines , such dividend paid by HSBC-Philippines to HSBC is subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2(a), Article 9 of the Philippines-UK 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