ITAD BIR Ruling No. 177-11

June 27, 2011 ITAD BIR RULING NO. 177-11 Article 11, Philippines-United States of America Tax Treaty; BIR Ruling No. ITAD 78-10; BIR Ruling No. ITAD 39-10 Sanofi-Aventis Philippines, Inc. 3rd Floor, Feliza Building 108 V.A. Rufino Street Legaspi Village, Makati City Attention: Ms. Gladys M. Solidum Compliance Manager Gentlemen : This refers to your letter dated September 15, 2009 requesting confirmation that dividends paid to AVENTIS HOLDINGS, INC. ("AVENTIS") by SANOFI-AVENTIS PHILIPPINES, INC. ("SANOFI-PHILIPPINES") (formerly, AVENTIS PHARMA, INC.) are subject to a preferential tax rate of 20 percent pursuant to Article 11 of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-United States tax treaty") . It is represented that AVENTIS is a foreign corporation organized and existing under the laws of the United States based on the Certificate of Incorporation filed at the State of Delaware in the United States on November 28, 2001; that AVENTIS is located at 3711 Kennett Pike, Suite 200, Greenville, Delaware 10807, United States; that AVENTIS 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 September 10, 2009; and that, on the other hand, SANOFI-PHILIPPINES is a domestic corporation located at 3rd Floor, Feliza Building, 108 V.A. Rufino Street, Legaspi Village, Makati City, Philippines. It is further represented that on September 8, 2009, the Board of Directors of SANOFI-PHILIPPINES declared cash dividends amounting to TWO HUNDRED MILLION PESOS (Php200,000,000.00) payable on October 15, 2009, based on the Certificate issued by the Corporate Secretary of SANOFI-PHILIPPINES on September 14, 2009; that since October 2, 2003, AVENTIS owns 534,358 shares of stock of SANOFI-PHILIPPINES based on the Certificate issued by the same Corporate Secretary on September 14, 2009; and that as of September 1, 2009, AVENTIS holds 27.12 percent of the voting stock of SANOFI-PHILIPPINES, based on the letter of SANOFI-PHILIPPINES to the Bureau of Internal Revenue dated September 15, 2009. It is finally represented that the dividends subject of this ruling are 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 Certification issued by the same Corporate Secretary on September 14, 2009. EIcSTD In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends paid to AVENTIS, being a foreign corporation not engaged in trade or business in the Philippines, are 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 interests, 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%). xxx xxx xxx However, Section 32 (B) (5) of the Code provides that such dividends may be exempt from tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, 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" In this connection, you invoke the Philippines-United States tax treaty. Paragraphs 1 and 2, Article 11 thereof provide: "Article 11 DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed a) 25 percent of the gross amount of the dividend; or b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of the United States may be taxed in the Philippines at a rate not exceeding 20 percent of the gross amount thereof if the recipient is a corporation which owns at least 10 percent of the outstanding shares of stock of the corporation paying the dividends during the part of the latter corporation's taxable year which precedes the date of payment of the dividends and during the whole of its prior taxable year (if any), and 25 percent of the gross amount of the dividends in all other cases. This being the case, this Office is of the opinion and so holds that since AVENTIS is a corporation which owns at least 10 percent (in fact, 27.12 percent) of the voting stock of SANOFI-PHILIPPINES during the latter's taxable year before the date of payment of the dividends on October 15, 2009 and during the whole of its preceding taxable year (in fact, since October 2, 2003), such dividends paid by SANOFI-PHILIPPINES to AVENTIS are subject to income tax at a preferential rate of 20 percent of the gross amount thereof pursuant to paragraph 2 (b), Article 11 of the Philippines-United States tax treaty. (BIR Ruling No. ITAD 78-10 dated December 14, 2010; BIR Ruling No. ITAD n September 21, 2010) 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. acEHSI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official copy.