ITAD BIR Ruling No. 186-11

July 1, 2011 ITAD BIR RULING NO. 186-11 Article 11, Philippines-United States tax treaty; BIR Ruling No. DA-ITAD-32-09; BIR Ruling No. ITAD-135-05 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 8, 2011, requesting confirmation that the dividend payments of Microsoft Philippines, Inc. ("MPI") to Microsoft Corporation ("MC") are subject to final withholding tax at the preferential rate of 20 percent under Article 11 (2) (b) 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 MC is a corporation organized and existing under the laws of the United States of America with principal address at One Microsoft Way, Redmond, WA, 98052-6399; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated April 6, 2011; and that, on the other hand, MPI is a corporation organized and existing under the laws of the Philippines with principal address at 16th and 17th Floor, 6750 Ayala Office Tower, 6750 Ayala Avenue, Makati City. It is further represented that from July 3, 1995 until June 30, 2010, MC holds 1,250 common shares valued at P12,500,000.00 representing 100% ownership in MPI including the 5 shares held by its nominees to MPI's Board of Directors per Corporate Secretary's certification issued by MPI dated April 7, 2011; that on January 26, 2011, the Board of Directors of MPI declared cash dividend in the total amount of Thirty-Three Million Eight Hundred Thousand Pesos (PhP33,800,000.00) to be distributed among stockholders of record as of June 30, 2010 pro-rata to their respective shareholdings, based on the number of shares held by them as of June 30, 2010; and that the said dividends shall be paid not later than April 1, 2011. It is finally represented that the issue or transaction subject of this 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 per the Sworn Statement issued by MPI dated April 7, 2011. EAISDH 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 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 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, Section 32 (B) (5) of the Tax Code of 1997, as amended, 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." In this particular case, you invoked Article 11 of the Philippines-United States tax treaty. It provides: "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 5. The term "dividends" as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident." HCSEIT Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident of the United States at a rate not exceeding 20 percent of the gross amount of the dividends 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 were owned by the recipient corporation; or 25 percent, in all other cases. In view thereof and considering that MC holds 100% shareholdings in MPI, during the part of the latter's taxable year which precedes the payment of the dividends and the whole of its prior taxable year, dividends paid by MPI to MC are subject to the preferential tax rate of 20 percent, pursuant to the Article 11 (2) (b) of Philippines-United States tax treaty. (BIR Ruling No. DA-ITAD-032-09 dated March 6, 2009; BIR Ruling No. ITAD-135-05 dated November 15, 2005) 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