ITAD BIR Ruling No. 178-14

September 18, 2014 ITAD BIR RULING NO. 178-14 Article 10 (Dividends), Philippines-Netherlands tax treaty Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. Wilfredo U. Villanueva Principal, Tax Services Gentlemen : This refers to your tax treaty relief application filed on August 12, 2013 requesting confirmation on your opinion that the dividends paid by Accenture Healthcare Processing, Inc. ("Accenture Healthcare") to Accenture Holdings B.V. ("Accenture Holdings") are subject to 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"). Facts Accenture Holdings is a foreign corporation and a resident of the Netherlands based on its Articles of Association and Declaration of Residence issued by the Tax Administration of Rivierenland in the Netherlands on July 1, 2013. Accenture Holdings is located at Gustav Mahlerplein 90, 1082 MA, Amsterdam, Netherlands. Accenture Holdings is a company with an authorized capital of One Hundred Thousand Euros (100,000.00) which is divided into 2,000 shares of stock, each share with a nominal value of 50.00. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on August 12, 2013. On the other hand, Accenture Healthcare is a domestic corporation situated at 27th Floor GT Tower International, Ayala Avenue corner H.V. Dela Costa St., Makati City, Philippines. Based on the two Secretary's Certificates issued on August 7, 2013, the Board of Directors of Accenture Healthcare , during a special meeting held on August 5, 2013, approved a resolution declaring cash dividends out of the corporation's unrestricted retained earnings as of June 30, 2013 in the amount of US$7,000,000.00, in favor of Accenture Holdings . Such dividends will be paid on August 14, 2013. As of August 5, 2013, Accenture Holdings holds 99.99 percent of the common shares of stock of Accenture Healthcare as described below: acHTIC Stockholder Number and Value Mode of Acquisition Date Percentage of of Shares Acquisition Ownership Accenture 3,995 Subscription 2003 99.99 percent Holdings (P399,500.00) Based on the Certification issued by Citibank N.A. Manila on December 16, 2013, the dividends were remitted by Accenture Healthcare to Accenture Holdings on November 14, 2013. Ruling In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends are considered derived in the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. cSIADa (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) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "SEC. 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." In this particular case, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: STCDaI "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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed 10 percent if the recipient 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 15 percent in all other cases. Accordingly, since Accenture Holdings is a company in the Netherlands the capital of which is wholly divided into shares, and that Accenture Holdings holds directly 99.99 percent or more than the 10% requirement of the capital of Accenture Healthcare , such dividend paid by Accenture Healthcare to Accenture Holdings are subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 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. acHITE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.