ITAD BIR Ruling No. 196-11

July 21, 2011 ITAD BIR RULING NO. 196-11 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. ITAD 31-99; BIR Ruling No. ITAD 45-04; BIR Ruling No. ITAD 53-03; BIR Ruling No. ITAD 24-03; BIR Ruling No. ITAD 82-02 Nisce Mamuric Guinto Rivera and Alcantara Unit 804, 139 Corporate Center 139 Valero St., Salcedo Village 1227 Makati City Attention: Pericles C. Consunji Lindy Andre P. Ablaa Gentlemen : This refers to your Tax Treaty Relief Application filed on November 9, 2010, on behalf of AIR LIQUIDE PHILIPPINES, INC. ("ALPHIL"), requesting confirmation that the dividends to be paid by Airliquide-Phil. to AIR LIQUIDE INDUSTRIAL SERVICES PTE. LTD. ("ALIS") are subject to the preferential tax rate of 15 percent 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") . It is represented that ALIS is a foreign corporation organized and existing under the laws of Singapore with registered office address at 298 Tiong Bahru Road, #20-01/06 Tiong Bahru Plaza, Singapore 168730 and is a resident thereof per Certificate of Residence issued by the Inland Revenue Authority of Singapore dated September 20, 2010; that ALIS' License to Transact Business in the Philippines was cancelled on November 21, 1996 as evidenced by its Certificate of Cancellation of License of a Foreign Corporation under Securities and Exchange Commission ("SEC") Registration No. AF094-000017, certified by the SEC on November 9, 2010; and that, on the other hand, ALPHIL is a domestic corporation engaged in the production, distribution, and commercialization of industrial gases, with office address at Lot 37 DBP Avenue, FTI Complex, Taguig City. It is also represented that as of November 14, 2001, ALIS is the registered holder of Eight Hundred Eighty One Million Four Hundred Ninety-One Thousand Three Hundred Ninety-Four (881,491,394) common shares of ALPHIL, and that the said shares represent 74% of the outstanding capital stock of ALPHIL per Secretary's Certificate dated April 27, 2011; that at the special meeting of the Board of Directors of ALPHIL held on November 18, 2010, it was resolved that a cash dividend amounting to One Hundred Forty-Two Million Pesos (Php142,000,000.00) be distributed among ALPHIL's stockholders of record as of August 12, 2010, pro-rata to their respective shareholdings, based on the number of shares held by them, payable on the first week of December 2010; and that, per Sworn Statement of ALPHIL dated April 27, 2011, the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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 . . ., dividends, . . .: 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 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. xxx xxx xxx" In this particular case, the treaty involved is the Philippines-Singapore tax treaty, which, in its Article 10, provides: TEDAHI "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) 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. xxx xxx xxx" 4. The term 'dividends' as used in this Article means income from shares, "jouissance" shares or jouissance rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Singapore at a rate not exceeding 15 percent of the gross amount dividends if the latter holds directly at least 15 percent of the outstanding voting shares of the first-mentioned company, and such shareholdings should have existed during the part of the taxable year immediately preceding the day of payment of the dividends and during the whole of its prior taxable year. In all other cases, the 25 percent preferential tax rate shall apply. In view of the foregoing, since ALIS owns 74% of the outstanding shares of ALPHIL, the paying corporation, during the part of ALPHIL's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, this Office is of the opinion and so holds that the cash dividends to be paid by ALPHIL to ALIS are subject to the preferential rate of 15 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD 76-10 dated December 14, 2010; BIR Ruling No. ITAD 61-10 dated November 3, 2010; BIR Ruling No. ITAD 52-10 dated October 18, 2010; BIR Ruling No. ITAD 49-10 dated October 8, 2010; BIR Ruling No. ITAD 31-99 dated October 7, 1999) 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