ITAD BIR Ruling No. 176-13

July 3, 2013 ITAD BIR RULING NO. 176-13 Article 10, Philippines-Netherlands Tax Treaty Team Energy Corporation CTC BLDG. 2232, Roxas Blvd. Pasay City Attention: Kazunobu Takijima VP Controller Gentlemen : This refers to your tax treaty relief application dated December 22, 2011, on behalf of Tokyo Electric Power Company International B.V. ("TEPCI") , requesting confirmation that dividend payments made by Team Energy Corporation ("TEC") to TEPCI are subject to 10 percent preferential tax rate 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") . ITEcAD It is represented that TEPCI, with address at Strawinskylaan 3105, 1077 ZX Amsterdam, Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty based on the Declaration of Residence issued by the Director General of the Tax and Customs Administration of the Netherlands dated June 21, 2011; that based on its Articles of Association, TEPCI is a company incorporated under the laws of the Netherlands with authorized capital of two hundred forty million euro (240,000,000) divided into two hundred forty thousand shares, each having a nominal value of one thousand euros (1,000) each; that TEPCI is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on March 22, 2011; and that, on the other hand, TEC is a domestic corporation duly organized and existing under Philippine laws, located at the CTC Bldg., 2232, Roxas Blvd., Pasay City. It is further represented, as shown in the Secretary's Certificate issued by TEC dated December 22, 2011, that at the meeting of the Board of Directors held on even date, the Board of Directors approved the declaration of dividends in the amount of US$55,200,000.00, payable to all the stockholders of record of TEC as of December 22, 2011; that as of December 22, 2011, TEPCI holds 16,534,177 shares with par value of Php10.00 each share, representing 50% outstanding shares in TEC; and that these shares were acquired by TEPCI on August 24, 2007 pursuant to a merger between Marubeni Corporation and TEPCI; and that per Secretary's Certificate issued by TEC dated March 19, 2013, dividend in the amount of USD24,840,000.00 was remitted by TEC to TEPCI on December 23, 2011. It is finally represented, based on the same Secretary's Certificate, that the transaction subject of the request for 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 of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "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%). AaSTIH xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt from tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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, what you invoke for this purpose is Article 10 of the Philippines-Netherlands tax treaty. 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. 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. TaISDA xxx xxx xxx" Based on the aforequoted provisions, 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, since TEPCI holds directly 50 percent of the capital of TEC (which is actually more than the required minimum shareholding of 10 percent), such dividends to be paid by TEC to TEPCI 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. 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