ITAD BIR Ruling No. 175-11

June 22, 2011 ITAD BIR RULING NO. 175-11 Article 10, Philippines-France tax treaty; BIR Ruling No. 017-01; BIR Ruling No. DA-ITAD-004-02; BIR Ruling No. DA-ITAD-064-03; BIR Ruling No. DA-ITAD-196-03; BIR Ruling No. DA-ITAD-101-04 Law Office of A.M. Sison, Jr. & Partners Suite 2002-A Security Bank Centre 6776 Ayala Avenue, 1226 Makati City Philippines, P.O. Box 3222, MCPO Attention: Antonio L. Cardio Gentlemen : This refers to the Tax Treaty Relief Application (TTRA) filed on October 27, 2010, on behalf of your clients, SARA LEE PHILIPPINES, INC. ("Sara Lee-Phil") and SARA LEE FRANCE S.N.C., ("Sara Lee-France") , requesting confirmation of your opinion that the dividend payments made or to be made by Sara Lee-Phil to Sara Lee-France are subject to 10 percent preferential tax rate under Article 10 (2) (a) of 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 ("Philippines-France tax treaty") , as amended. It is represented that Sara Lee-France is a corporation organized and existing under the laws of France with principal address at 22, avenue des Nations Paris Nord 2 Le Rimbaud 93420 Villepinte based on the Certificate of Residence issued by Luc LE GARSMEUR, Inspecteur, MINISTRE DU BUDGET DES COMPTES PUBLICS ET DE LA FONCTION PUBLIQUE on March 29, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated June 9, 2010; and that, on the other hand, Sara Lee-Phil is a corporation organized and existing under the laws of the Philippines with principal address at 24/F Insular Life Corporate Center, Corporate Avenue, Alabang, Muntinlupa City. It is further represented, based on the Secretary's Certificate issued by Sara Lee-Phil dated October 19, 2010 that the subscribed and paid up shares of Sara Lee-France as of September 30, 2010 are 2,097,902 with a par value of P1.00 per share, which represent 54.11% of the outstanding voting stock of Sara Lee-Phil; that on October 11, 2010, the Board of Directors of Sara Lee-Phil resolved that a cash dividend of P167,873,970.00 or P43.30 per share be declared to stockholders of record as of September 30, 2010, which is payable on October 28, 2010; and that, the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per the Sworn Certification issued by Sara Lee-Phil dated October 19, 2010. EHaASD 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 received 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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-France tax treaty, as amended, 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 a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may 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) 15 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, 25 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as 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." In accordance with the foregoing, the 15 percent preferential tax rate on dividends apply whenever the beneficial owner/recipient of the dividends owns at least 10 percent of the voting shares of the paying company. However, the Protocol amending the foregoing provisions of the Philippines-France tax treaty which took effect on January 1, 1998, reads as follows: AICHaS "Article 5 In Article 10 of the Convention: In paragraph 2, the rates of '15 percent' and '25 percent' are replaced respectively by '10 percent' and '15 percent'; " Based on the above provisions of the Protocol, the dividends payable to Sara Lee-France shall be subject to withholding tax at the rate of 10 percent of the gross amount of the dividends considering that the transaction transpired after the effectivity of the Protocol and Sara Lee-France is the holder and beneficial owner of 54.11% of the total voting shares of Sara Lee-Phil as of September 30, 2010. (BIR Ruling No. 017-01 dated February 19, 2001; BIR Ruling No. DA-ITAD-004-02 dated January 11, 2002; BIR Ruling No. DA-ITAD-064-03 dated April 25, 2003; BIR Ruling No. DA-ITAD-196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-101-04 dated September 13, 2004) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue