ITAD BIR Ruling No. 199-12

May 22, 2012 ITAD BIR RULING NO. 199-12 Articles 3 (Fiscal Residence) and 11 (Dividends) Philippines-United States of America tax treaty Philippine Long Distance Telephone Company Ramon Cojuangco Building Makati Avenue Makati City Attention: Kathryn A. Zarate Assistant Vice President Gentlemen : This refers to your applications for tax treaty relief all dated April 8, 2011 requesting confirmation that dividends paid by the Philippine Long Distance Telephone Company ("PLDT") to the following stockholders, namely: 1. American Funds Insurance Series International Fund (originally American Pathway Fund, then American Variable Insurance Series, then American Funds Insurance Series ); THIECD 2. Calvert World Values Fund, Inc. International Equity Fund; 3. Lazard Emerging Markets Equity Blend Portfolio ; 4. Lazard Emerging Markets Equity Portfolio ; 5. Lazard Retirement Emerging Markets Equity Portfolio ; 6. MFS Variable Insurance Trust II International Growth Portfolio ;and 7. State of New Jersey Common Pension Fund D ,(collectively, the " Seven United States PLDT Stockholders "). are subject to income tax at the rate of 25 percent pursuant to 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 the Seven United States PLDT Stockholders are either corporations or trusts organized and existing under the laws of the United States based on their Articles of Incorporation (in the case of No. 2) or Declaration of Trust, as amended (in the case of No. 1),or based on the Articles of Incorporation, as supplemented, of the original corporations who issued the shares of stock (in the case of Nos. 3 and 4, the shares of stock of which are issued by The Lazard Funds, Inc. ,and in the case of No. 5, the shares of stock of which are issued by The Lazard Retirement Series, Inc. ),or on the Declaration of Trust, as amended, of the original trust who issued the shares of stock (in the case of No. 6, the shares of stock of which are issued by MFS/Sun Life Series Trust ;that in the case of No. 7, this is formed within the Division of the Department of the Treasury of the State of New Jersey of the United States based on the document submitted for this purpose; that the Seven United States PLDT Stockholders are all residents of the United States based on their respective Certificates of Residence issued by the Internal Revenue Service of the United States on February 14, 22 and 28 and March 7, 2011; that the Seven United States PLDT Stockholders are all situated in the United States at 1. American Funds Insurance Series International Fund: 333 South Hope Street, Los Angeles California; 2. Calvert World Values Fund, Inc. International Equity Fund: 4550 Montgomery Avenue, Bethesda, Maryland; 3. Lazard Emerging Markets Equity Blend Portfolio: 30 Rockefeller Plaza, New York, New York; CIETDc 4. Lazard Emerging Markets Equity Portfolio: 30 Rockefeller Plaza, New York, New York; 5. Lazard Retirement Emerging Markets Equity Portfolio: 30 Rockefeller Plaza, New York, New York; 6. MFS Variable Insurance Trust II International Growth Portfolio: 50 West State Street, 9th Floor, Trenton, New Jersey; and 7. State of New Jersey Common Pension Fund D: 500 Boylston Street, Boston, Massachusetts. That the Seven United States PLDT Stockholders are not registered as corporations or partnerships in the Philippines based on the respective Certificates of Non-Registration issued by the Securities and Exchange Commission on June 17 and August 9, 2011; and that, on the other hand, PLDT is a domestic corporation situated at Ramon Cojuangco Building, Makati Avenue, Makati City, Philippines. It is further represented based on the Certificates issued by the Corporate Secretary of PLDT on March 16 and 29, 2011, that PLDT (through a meeting of its Board of Directors on March 1, 2011) declared regular cash dividends amounting to P78.00 and special cash dividends amounting to P66.00 per common share of stock in favor of its common stockholders of record as of March 16, 2010; that the dividends will be taken out of the audited and unrestricted retained earnings of PLDT as of December 31, 2010, and payable on April 19, 2011; that based on the Certification issued by the American Depository Receipts Department of J.P. Morgan (of 90 Broad Street (16th Floor),New York City, New York, United States) on March 25, 2011 (for Nos. 2, 3, 4, 5 and 7),and on the Certification issued by the Securities and Custody Operations Department of Deutsche Bank AG Manila Branch (of 26th Floor, Ayala Tower One, Ayala Triangle. Ayala Avenue, Makati City, Philippines) on March 30, 2011 (for Nos. 1 and 6),below is the percentage of ownership in PLDT of each of the Seven United States PLDT Stockholders as of the record date mentioned: Stockholder Number of Value (in P) Percentage Shares 1. American Funds Insurance Series International 726,800 1,504,476,000.00 0.3892 Fund 2. Calvert World Values Fund, Inc. International 48,741 100,893,870.00 0.0261 Equity Fund 3. Lazard Emerging Markets Equity Blend Portfolio 17,465 36,152,550.00 0.0094 4. Lazard Emerging Markets Equity Portfolio 6,365,350 13,176,274,500.00 3.4084 5. Lazard Retirement Emerging Markets Equity 316,500 655,155,000.00 0.1695 Portfolio 6. MFS Variable Insurance Trust II International 13,325 27,582,750.00 0.0071 Growth Portfolio 7. State of New Jersey Common Pension Fund D 230,800 477,756,000.00 0.1236 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 respective Sworn Statements issued by the Assistant Vice President of PLDT on May 4, 2011. EAcIST In reply, please be informed that under Section 28 (B) (5) (a) of the National Internal Revenue Code of 1997 ("Tax Code") ,as amended, dividends paid to the Seven United States PLDT Stockholders are subject to income tax at the rate of 30 percent, 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-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) and (d) above: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these 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." For this purpose, you invoke the Philippines-United States tax treaty. Paragraphs 1 and 2, Article 11 thereof provide: "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." AaSHED Under paragraph 2 above, dividends arising in the Philippines and paid to a resident of the United States 1 may be taxed in the Philippines at a rate not to exceed (a) 20 percent if the recipient of the dividends is a corporation which owns at least 10 percent of the outstanding shares of the voting stock of the corporation paying the dividends during the part of the latter's taxable year preceding the date of payment of the dividends and during the whole of its prior taxable year (if any);and (b) 25 percent in all other cases. Accordingly, since each of the Seven United States PLDT Stockholders does not own at least 10 percent of the outstanding shares of the voting stock of PLDT, such dividends paid by PLDT to each of the Seven United States PLDT Stockholders are subject to income tax at the rate of 25 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 11 of the Philippines-United States 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. The term resident of the United States includes both a corporation and a trust pursuant to paragraph 1 (b), Article 3 of the Philippines-United States tax treaty, to wit: "Article 3 FISCAL RESIDENCE 1. In this Convention: xxx xxx xxx b) The term 'resident of the United States' means: (i) A United States corporation ,and (ii) Any other person (except a corporation or any entity treated as a corporation for United States tax purposes) resident in the United States for purposes of United States tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such partnership, estate, or trust is subject to United States tax as the income of a resident either in the hands of the respective entity or of its partners or beneficiaries."