ITAD BIR Ruling No. 212-13

July 31, 2013 ITAD BIR RULING NO. 212-13 Article 10 (2) (a), Philippines-Netherlands tax treaty Castillo Laman Tan Pantaleon & San Jose The Valero Tower, 122 Valero Street, Salcedo Village, Makati City Attention: Atty. Alvin O. Geli Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on 09 September 2011 requesting confirmation that the dividend payment of your client, Reckitt Benckiser Healthcare (Philippines) ("RBH") to Maddison Square Holding B.V. ("MSH") is subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty") . 1 It is represented that MSH is a corporation duly organized and existing under the laws of the Netherlands with principal business address at Siriusdreef 14, 2132 WT Hoofddorp, Netherlands based on the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands dated 27 September 2011; that MSH has an authorized capital of ninety thousand eight hundred Euro (EUR90,800),divided into two thousand (2,000) shares with a par value of forty-five Euro and forty Euro cents (EUR45.40),of which one thousand six hundred (1,600) are ordinary shares class A, two hundred (200) are ordinary shares class B, one hundred (100) are cumulative preference shares class C and one hundred (100) are ordinary shares class D; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated 03 August 2011; and that RBH, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with business address at 22nd Floor, Equitable Bank Tower, 8751 Paseo de Roxas, Philippines. It is further represented that in a Special Meeting held on 17 August 2011, the Board of Directors of RBH authorized the declaration of cash dividend in the amount of USD100,000,000.00 out of the unrestricted retained earnings of RBH as of 31 December 2010, payable on or before 15 November 2011 per Secretary's Certificate issued by RBH dated 05 September 2011; that per the same Secretary's Certificate, MSH holds 800,000 common and 76,687 preferred shares the total of which constitutes 100 percent ownership in RBH; and that the said shares were acquired pursuant to a merger between RBH and Reckitt Benckiser (Philippines),Inc. on 18 February 2011 based on the Secretary's Certificate issued by RBH dated 05 September 2011. TaCEHA Finally, as proof of payment of the subject dividend, per 08 April 2013 Certification issued by the Citibank, N.A.,on 22 December 2011, an outward remittance was made to JP Morgan Chase Bank, N.A. Netherlands via Citibank London by means of telegraphic transfer in the amount of EUR One Million Three Thousand Eighty-Six & 42/100 (EUR1,003,086.42) in favor of MSH, and its equivalent amount in Pesos had been debited from the account of RBH. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). . . ." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It provides: TCEaDI "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." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides: "Article 10 Dividends 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. SIaHDA 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. ..." Based on the foregoing provisions, the Philippines may tax the dividends paid by a resident company to a company which is a resident of the Netherlands at a rate not exceeding 10 percent if the last-mentioned company, the capital of which is wholly or partly divided into shares, holds directly at least 10 percent of the capital of the company paying the dividends. Such being the case and considering that MSH is a company, the capital of which is wholly or partly divided into shares, and since it holds 100 percent of the capital of RBH, this Office is of the opinion and so holds that the dividend payments by RBH to MSH shall be subject to the preferential tax rate of 10 percent based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. EaHDcS This ruling is issued on the basis of the foregoing 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. Signed 09 March 1989 and effective 20 September 1991.