ITAD BIR Ruling No. 192-11

July 12, 2011 ITAD BIR RULING NO. 192-11 Article 10, Philippines-France tax treaty, as amended; BIR Ruling No. ITAD-017-01; BIR Ruling No. DA-ITAD-004-02; BIR Ruling No. DA-ITAD-064-03; BIR Ruling No. DA-ITAD-196-03; BIR Ruling No. DA-ITAD-101-04 Manabat Sanagustin & Co. Certified Public Accountants and Management Consultants 22nd Floor Philamlife Tower 8767 Paseo de Roxas, Makati City Attention: Atty. Roberto L. Tan Partner, Tax Ms. Maria Myla S. Maralit Director, Tax Atty. Nelson D. Edralin Supervisor, Tax Gentlemen : This refers to your letter dated July 13, 2010 requesting confirmation that dividends paid by TELEPHILIPPINES, INC. ("Telephilippines") to TELEPERFORMANCE SA ("Teleperformance") are subject to 10 percent preferential tax rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty") , as amended by a Protocol 1 which took effect on January 1, 1998. It is represented that Teleperformance is a foreign corporation resident of France based on the Certificate of Residence dated May 6, 2010 issued by the tax authority of France; that its principal office is at 6 Rue Firmin, Gillot 75015 Paris, France; that Teleperformance is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company dated May 31, 2010 issued by the Securities and Exchange Commission; and that Telephilippines , on the other hand, is a domestic corporation with principal address at 12th Floor, Octagon Building, San Miguel Avenue, Ortigas Center, Pasig City, Philippines. It is further represented that on April 28, 2010, the Board of Directors of Telephilippines , at its meeting, declared cash dividends in the amount of Eighty Pesos (P80.00) per share or an aggregate dividend amount of TWO HUNDRED NINETY TWO MILLION EIGHT HUNDRED THOUSAND PESOS (P292,800,000.00) in favor of the stockholders of record of Telephilippines as of April 28, 2010, payable on July 31, 2010, based on the Certificate issued by the Corporate Secretary of Telephilippines on June 29, 2010; that as of June 11, 2010, Teleperformance owns 59.9999 percent of the subscribed capital stock of Telephilippines equivalent to 2,195,987 shares, each share with a par value of One Hundred Pesos (P100.00), or a total par value of Two Hundred Nineteen Million Five Hundred Ninety-Eight Thousand Seven Hundred Pesos (P219,598,700.00), based on the Certification issued by the same Corporate Secretary on June 11, 2010. 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 Finance Manager of Telephilippines on August 18, 2010. HaIATC 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 Teleperformance , 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 same 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, viz. : DAEICc "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 particular case, you invoke the Philippines-France tax treaty, as amended, Paragraphs 1 and 2, Article 10 thereof provide as follows: "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: a) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx" In accordance with the foregoing, dividends arising in the Philippines and paid to a resident of France are subject to income tax at a preferential rate of (a) 10 percent of the gross amount of the dividends if the beneficial owner of the dividends is a company (excluding partnership) which holds directly at least 10 percent of the voting shares of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Therefore, since Teleperformance holds directly at least 10 percent (in fact 59.996 percent) of the common (voting) shares of Telephilippines , such dividends to be paid by Telephilippines to Teleperformance 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-France tax treaty, as amended. (BIR Ruling No. ITAD-017-01 dated February 19, 2001; BIR Ruling No. DA-ITAD 196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-004-02 dated January 11, 2002; BIR Ruling No. DA-ITAD-064-03 dated April 25, 2003; BIR Ruling No. DA-ITAD-196-03 dated December 30, 2003; BIR Ruling No. DA-ITAD-101-04 dated September 13, 2004) 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. aEDCAH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol to the Tax Convention between the Government of the Republic of the Philippines and the Government of the French Republic.