ITAD BIR Ruling No. 200-12

May 22, 2012 ITAD BIR RULING NO. 200-12 Article 10 (7), Philippines-Netherlands tax treaty Shell Philippines Exploration B.V. 19 Floor Asian Star Building, Asean Drive Filinvest Corp. City, Alabang Muntinlupa City Attention: Jose Jerome R. Pascual III Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on September 22, 2011 requesting confirmation that the profits to be remitted to Shell Philippines Exploration B.V. ("Shell") by its Philippine branch office are subject to final withholding tax at the preferential rate of 10 percent, pursuant to Article 10 (7) of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . It is represented that Shell is a corporation duly organized and existing under the laws of The Netherlands with principal address at Carel Van Bylandtlaan 30, No. 2596 HR Den Haag, The Netherlands; that pursuant to a license issued by the Securities and Exchange Commission, Shell established a branch office in the Philippines ("Shell-Philippines"), with office address at 19th Floor, Asian Star Building, Asean Drive, Filinvest Corp. City, Alabang Muntinlupa City, under Company Registration No. 1359 issued on January 21, 2011; that Shell-Philippines was established to transact business in the Philippines to prospect for and produce solid, liquid, and gaseous hydrocarbons; and that on October 25, 2011, the Managing Director of Shell-Philippines executed a Sworn Affidavit certifying that on October 12, 2011, Shell-Philippines remitted branch profits to Shell, its head office in Netherlands, net of 10% Philippine withholding tax, amounting to Sixty Million US Dollars (USD60,000,000), with Philippine Peso equivalent of Php2,601,290,614.20. In reply, please be informed that Section 28 of the National Internal Revenue Code (Tax Code) of 1997, as amended, provides, viz.: "SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx (5) Tax on Branch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided, That interests, dividends, rents, royalties, including remuneration for technical services, salaries wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines." DHSCTI 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" Relative thereto, Article 10 (7) of the Philippines-Netherlands tax treaty which you invoked, may apply to the instant case. It provides: "Article 10 DIVIDENDS xxx xxx xxx 7. If a resident of one of the States has a permanent establishment in the other State, this permanent establishment may be subject to an additional tax on the profits remitted by that permanent establishment to its head office in accordance with the law of the last-mentioned State, but the additional tax so charged shall not exceed 10 per cent of the amount of the remitted profits. This provision shall not apply to profits mentioned in Article 8." (Underscoring ours) Under Article 5 of the same treaty, the term "permanent establishment" includes a branch, to wit: "Article 5 PERMANENT ESTABLISHMENT xxx xxx xxx 2. The term 'permanent establishment' includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, quarry or other place of exploration or extraction of natural resources; g) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or activity continues for a period of more than 183 days; h) the furnishing of services including consultancy services by an enterprise through an employee or other personnel where activities of that nature continue (for the same or a connected project) for a period or periods exceeding in the aggregate 183 days within any twelve-month period." (Underscoring ours) cEaSHC Based on the foregoing, branch profits remitted by a branch to its head office shall be subject to the 10 percent preferential tax rate instead of the 15 percent tax rate prescribed under Section 28 (A) (5) of the Tax Code of 1997. Hence, this Office confirms and so holds that Shell-Philippines, being a branch of Shell, qualifies to avail of the 10 percent preferential tax rate in relation to its branch profits remittance pursuant to Article 10 (7) of the Philippines-Netherlands tax treaty. This ruling is issued on the basis of the foregoing facts as represented. If upon investigation it shall be disclosed that the actual facts are different, 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