ITAD BIR Ruling No. 189-13

July 9, 2013 ITAD BIR RULING NO. 189-13 Article 10, Philippines-Singapore Tax Treaty Manabat Sanagustin & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Attention: Roberto L. Tan Principal, Tax Olivia P. Taganas Supervisor, Tax Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 21 December 2012 ,requesting confirmation that dividends paid by Mhe-Demag (P),Inc. ("Mhe-Demag-PH") to Mhe-Demag (S) Pte.,Ltd. ("Mhe-Demag-SG") ,are subject to the preferential tax rate of fifteen percent (15%) pursuant to Article 10 of The Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . 1 It is represented that Mhe-Demag-SG is a corporation organized and existing under the laws of Singapore and is a resident thereof with principal address at 33 Gul Circle, Singapore 629570 as confirmed by the Certificate of Residence issued on 27 December 2012; that Mhe-Demag-SG is not registered as a corporation or partnership in the Philippines, as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC),dated 15 January 2013; and that, on the other hand, Mhe-Demag-PH is a corporation organized and existing under the laws of the Philippines with principal address at Severina Diamond Industrial Estate, West Service Road, Km 16 South Expressway, Paraaque City. It is further represented, as certified by the Corporate Secretary of Mhe-Demag-PH, executed on 22 January 2013 that, during the regular meeting of its Board of Directors held on 05 December 2012, they declared cash dividends in the aggregate amount of THIRTY FIVE MILLION PHILIPPINE PESOS (PhP35,000,000.00);and that Mhe-Demag-SG holds FIVE HUNDRED TWENTY FIVE THOUSAND (525,000) common shares of Mhe-Demag-PH, with an aggregate amount of TWENTY-SIX MILLION TWO HUNDRED FIFTY THOUSAND PHILIPPINE PESOS (PhP26,250,000.00),that Mhe-Demag-SG owns 75% of the total outstanding capital stock of Mhe-Demag-PH. It is further represented that Mhe-Demag-PH paid the subject dividends through the bank facility of Deutsche Bank AG Manila Branch ("Deutsche Bank Manila") ,in the amount of USD FIVE HUNDRED THIRTY NINE THOUSAND FIVE HUNDRED TWENTY-TWO & 68/100 (USD539,522.68) on 26 December 2012 as evidenced by the Certification issued by Deutsche Bank Manila dated 24 January 2013. DaCTcA It is finally represented that the dividends subject of this TTRA 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 Financial Controller of Mhe-Demag-PH executed on 11 January 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, dividends paid to Mhe-Demag-SG are subject to income tax at the rate of 30%,thus: "SEC. 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 percent (30%) 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." * However, under Section 32 (B) (5) of the Tax Code, such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." With respect to a treaty, you invoke the Philippines-Singapore tax treaty. Paragraphs 1 and 2 of Article 10 thereof provide: "Article 10 Dividends 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: DHECac a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company'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 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation." Under paragraph 2 (a) of Article 10, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines at a rate not to exceed 15 percent if the company recipient of the dividends holds directly at least 15 percent of the outstanding shares of the voting stock of the paying company during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any). Accordingly, since Mhe-Demag-SG holds directly at least 15% of the outstanding capital stock of Mhe-Demag-PH (in fact 75% of the outstanding capital stock),the dividends are subject to income tax at the rate of 15% of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Singapore 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 Footnotes 1. Its provisions on taxes apply on income derived or which accrued beginning January 1, 1977.