ITAD BIR Ruling No. 197-12

May 21, 2012 ITAD BIR RULING NO. 197-12 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. ITAD-068-10; BIR Ruling No. ITAD-118-11 DBS Manila Representative Office 18th Floor, BPI Main Building 6768 Ayala Avenue corner Paseo de Roxas Makati City Attention: Mr. Edgardo Legarda Chief Representative-DBS Manila Gentlemen : This refers to your tax treaty relief application filed on April 23, 2010 on behalf of Development Bank of Singapore, ("DBS"),requesting confirmation that the dividend payment of Ayala DBS Holdings, Inc. ("ADHI") to DBS is subject to the preferential treaty rate of 15 percent final withholding tax pursuant to Article 10 (2) (a) 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") . SATDHE It is represented that DBS, with principal office address at 6 Shenton Way, Singapore 068809, is a corporation organized and existing under the laws of Singapore and is a resident of Singapore for income tax purposes per Certificate of Residence issued by the Inland Revenue Authority of Singapore dated April 3, 2010; that it is not registered either as a corporation or as a partnership in the Philippines but there is a DBS Bank Ltd. Manila Representative Office per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated September 9, 2009; and that ADHI, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with office address at Tower One, Ayala Triangle, Ayala Avenue, Makati City 1226. It is further represented that on April 13, 2010, the Board of Directors of ADHI unanimously approved the declaration of cash dividends of Six Hundred Twenty-Three Million Twenty Thousand Pesos (Php623,020,000.00) out of the unappropriated retained earnings of ADHI as of March 31, 2010, to all stockholders of record as of April 23, 2010 and payable on May 12, 2010 as per the Secretary's Certificate issued by ADHI dated April 22, 2010; that as of April 23, 2010, DBS owns 101,203,056 common shares out of the total 253,007,641 issued and outstanding shares of ADHI representing 40% the outstanding capital stock of ADHI as per Corporate Secretary's Certificate dated April 23, 2010; that said shares have been held by DBS since December 13, 2010 based on the Secretary's Certificate dated September 14, 2010. It is also represented that DBS Bank Ltd. Manila Representative Office is not licensed to conduct banking operations or transaction in the Philippines and as such, does not generate any operating income likewise does a material factor in the realization of dividends paid by ADHI to DBS, as evidenced by a sworn certification dated January 12, 2012. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on September 14, 2010, that the transaction subject of the 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 of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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 that any income may be exempt from income tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: "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: aCTHDA 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" Accordingly, there is the Philippines-Singapore tax treaty which is invoked in this application. Its Article 10 provides: "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. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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. IEHScT 6. Where a company which is a resident of a Contracting State derived profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company to persons who are resident of that State, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits even if the dividends paid or undistributed profits consist wholly or partly of profits or income arising in such other State." Based on the aforequoted provisions, the Philippines may tax the dividends paid by its resident to a resident of Singapore at a rate not exceeding 15 percent if the recipient is a company, and during the part of the payor's taxable year which precedes the date of payment of the dividend, and, during the whole of the payor's prior taxable year, at least 15 percent of the outstanding shares of the voting stock of the paying company were owned by the recipient, and 25 percent in all other cases. However, under paragraph 5, Article 10 of the Philippines-Singapore tax treaty, as amended, the reduced rates on dividends under paragraphs 2 and 3 of Article 10 will not apply to such dividends paid to DBS if they are effectively connected with a permanent establishment which DBS has in the Philippines. Under paragraph 2 (b), Article 5 of the tax treaty, DBS Bank Ltd. Manila Representative Office ,being an office of DBS in the Philippines, is considered a permanent establishment of DBS in the Philippines, thus: "Article 5 PERMANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes specially but is not limited to: a) A seat of management; b) A branch; c) An office ; d) A store or other sales outlet; e) A factory; f) A workshop; g) A warehouse, in relation to a person providing storage facilities for others; h) A mine, quarry, or other place of extraction of natural resources; i) A building site or construction or assembly project or installation project or supervisory activities in connection therewith, provided such site, project or activity continues for a period more than 183 days; and j) The furnishing of services, including consultancy services, by a resident of one of the Contracting States through employees or other personnel, provided activities of that nature continue (for the same or a connected project) within the other Contracting State for a period or periods aggregating more than 183 days. CITDES xxx xxx xxx" On the question of whether dividends are effectively connected with a permanent establishment, the relevant commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 17, 2008) mention that dividends are effectively connected if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: "24. Certain States consider that dividends ,interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence when the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Singapore tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'.It does not stipulate that dividends flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment .In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Singapore tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Emphasis added) (Pages 156-157) Similarly, based on the Supreme Court ruling in Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989), dividends paid to the head office of a foreign corporation which has a branch office in the Philippines are effectively connected to the branch office if the business transactions that give rise to the dividends are conducted through the branch office, thus: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch. Consequently, the taxpayer is the foreign corporation not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." Applying the OECD commentaries and the Supreme Court ruling, such dividends paid by ADHI to DBS cannot be considered as effectively connected with the DBS Bank Ltd. Manila Representative Office since, as represented, DBS Bank Ltd. Manila Representative Office has no investments nor owns shares of stock in Maxima ; DBS Bank Ltd. Manila Representative Office neither uses nor holds for use in the conduct of its trade or business any shares of stock in ADHI; and those shares in ADHI were acquired directly by its head office in Japan without the participation of DBS Bank Ltd. Manila Representative Office .Consequently, all gains (dividends) that arise from these shares inure to the sole benefit of the head office and are not received by DBS Bank Ltd. Manila Representative Office ,and hence, DBS Bank Ltd. Manila Representative Office is not a material factor in the realization of such gains (dividends) received by the head office. cHTCaI Since DBS holds 40% of the total outstanding shares of stock of ADHI since December 13, 2000 up to the present, the dividend payments to it by ADHI shall be subject to income tax in the Philippines at the rate of 15 percent based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-68-10 dated December 3, 2010; BIR Ruling No. 118-11 dated April 11, 2011) 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