ITAD BIR Ruling No. 200-14

October 3, 2014 ITAD BIR RULING NO. 200-14 Article 9 (Dividends) Philippines-UK tax treaty IASA, Inc. 25th Floor RCBC Plaza, Tower I Ayala Avenue, Makati City Attention: Ms. Mary Jennifer D. Dayrit General Manager Gentlemen : This refers to your tax treaty relief application filed on May 5, 2014 requesting confirmation that dividends paid by IASA, Inc. ( "IASA-Philippines" ) to International Airline Services, Ltd. ( "International Airline" ) are subject to income tax at the rate of fifteen percent of the gross amount thereof pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ( "Philippines-UK tax treaty" ). Facts International Airline is a foreign corporation organized and existing under the laws of the United Kingdom and is a resident thereof based on its Articles of Association and Certificate of Residence issued by Her Majesty's Revenue and Customs, London on March 31, 2014. International Airline is located at Bridge House, 4 Borough High Street, London, United Kingdom. Based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 13, 2013, International Airline is not registered as a corporation or partnership in the Philippines. On the other hand, IASA-Philippines is a domestic corporation situated at 25th Floor RCBC Plaza, Tower I, Ayala Avenue, Makati City, Philippines. TcHCDE Based on the Director's Certificate issued on April 2, 2014, the Board of Directors of IASA-Philippines , during a special meeting on March 7, 2014, declared cash dividends amounting to US$500,000 in favor of the company's stockholders of record as of December 31, 2013, and payable on October 15, 2014 and December 15, 2014. The dividends will be taken out of the undivided surplus profits of IASA-Philippines . As of record date, International Airline holds 149,995 common shares of stock, which represent 99.99 percent of the total shares of stock issued and outstanding of IASA Philippines . Finally, the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceeding, or judicial appeal, based on the Sworn Statement issued by the General Manager of IASA-Philippines on April 30, 2014. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "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: n 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, such dividends are exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." With respect to a treaty, you invoke the Philippines-UK tax treaty. It provides: "Article 9 Dividends 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: CcTIDH a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. xxx xxx xxx 4. The term "dividends" as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company." Under Article 10, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of United Kingdom at a rate not to exceed 15 percent of the gross amount of the dividends if the latter holds directly or indirectly at least 10 percent of the voting stock of the first-mentioned company. In all other cases, the 25 percent preferential tax rate shall apply. Accordingly, since International Airlines holds directly 99.99 percent or more than 10 percent of the total shares of IASA-Philippines , such dividend paid by IASA-Philippines to International Airlines are subject to income tax at the rate of 15 percent , pursuant to paragraph 1 (a), Article 9 of the Philippines-UK 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.