ITAD BIR Ruling No. 176-11

June 27, 2011 ITAD BIR RULING NO. 176-11 Article 10 (2) (a) Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 029-10; BIR Ruling No. DA-ITAD 067-10; BIR Ruling No. DA-ITAD 040-09 Mr. Manuel V. Pangilinan 10/F MGO Building Legazpi Village 0721 Makati City, Philippines Sir : This refers to your tax treaty relief application ("TTRA") filed on March 28, 2011 requesting confirmation that the withholding tax rate on the dividends paid to Asia Link B.V. ("Asia Link") by Philex Mining Corporation ("PMC") is 10 percent pursuant to Article 10 (2) (a) of 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") . 1 It is represented that Asia Link is a corporation duly organized and existing under the laws of the Netherlands with principal business address at Prins Bernhardplein 200 1097 JB Amsterdam, the Netherlands, with authorized capital amount of Ninety-One Thousand Euros (EUR91,000) divided into nine hundred and ten (910) shares of One Hundred Euros (EUR100) each, per its Amended Articles of Association; that it is a fiscal resident in the Netherlands for purposes of taxation as certified by the Tax and Customs Administration of the Netherlands on March 11, 2011; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company dated March 9, 2011 issued by the Securities and Exchange Commission; and that PMC, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with business address at 27 Brixton corner Fairlane Streets, Pasig City 1600, Philippines. It is further represented that on February 23, 2011 the Board of Directors of PMC approved a declaration of cash dividend in the amount of Sixteen Centavos (P0.16) per share to all stockholders on record as of March 10, 2011, payable on or before April 5, 2011; that as per certification issued by the Corporate Secretary of PMC, Asia Link holds 1,023,275,990 common shares constituting 20.78% of the issued and outstanding shares of PMC as of March 10, 2011; and that the issue or transaction subject of this request or 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 as per certification issued by the Corporate Secretary of PMC dated March 16, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: acIASE "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 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%)." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It 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." 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. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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. SITCcE xxx xxx xxx" Based on the foregoing provisions, the Philippines may tax the dividends paid by a resident company to a company which is a resident of the Netherlands at a rate not exceeding 10 percent if the last-mentioned company, the capital of which is wholly or partly divided into shares, holds directly at least 10 percent of the capital of the company paying the dividends. Such being the case and considering that Asia Link is a company, the capital of which is wholly or partly divided into shares, and which holds 20.78% of the capital of PMC, this Office is of the opinion and so holds that the dividend payments by PMC to Asia Link shall be subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD 029-10 dated August 27, 2010; BIR Ruling No. DA-ITAD 067-10 dated June 21, 2010; BIR Ruling No. DA-ITAD 040-09 dated March 25, 2009). 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 Footnotes 1. Signed March 9, 1989 and effective September 20, 1991.