ITAD BIR Ruling No. 215-14

October 8, 2014 ITAD BIR RULING NO. 215-14 Articles 10 (Dividends) Philippines-Singapore tax treaty Follosco Morallos & Herce Attorneys at Law 26th Floor, 88 Corporate Center 141 Valero Street Corner Sedeo Street Salcedo Village, Makati City Attention: Rachel P. Follosco Partner Gentlemen : This refers to your tax treaty relief application filed on November 7, 2013 requesting confirmation that dividends paid by Oakwood Management Services (Philippines), Inc. ("Oakwood Management") to Oakwood Asia Pacific Limited ("Oakwood") are subject to a preferential rate of 15 percent pursuant to 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"). It is represented that Oakwood Asia is a corporation organized and existing under the laws of Malaysia based on its amended Memorandum and Articles of Association. It is duly registered in Singapore under the Companies Act on November 29, 2006. Oakwood Asia is a resident of Singapore with principal office at 80 Robinson Road, #02-00, Singapore, based on its Certificate of Residence issued by the Inland Revenue Authority of Singapore on April 29, 2013. Oakwood Asia is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on July 31, 2013. On the other hand, Oakwood Management is a domestic corporation with principal office at Suite 2500, 25th Floor, 88 Corporate Center, 141 Valero Street corner Sedeo Street, Salcedo Village, Makati City, Philippines. SIcTAC It is also represented based on the Corporate Secretary's Certificate issued on October 1, 2013 that, as of December 31, 2012, Oakwood Asia holds 79,195 shares of Oakwood Management which constitute 99.99 percent ownership in Oakwood Management. Oakwood Asia holds these shares since January 14, 2000. It is further represented based on the same Corporate Secretary's Certificate that on April 23, 2013, the Board of Directors of Oakwood Management declared cash dividends amounting to P75.00 per share or an aggregate amount of P5,940,000.00 payable to all stockholders of record as of December 31, 2012 and payable on or before December 31, 2013. Based on the Certification issued by the Hongkong and Shanghai Banking Corporation Limited on January 15, 2014, Oakwood Management remitted dividend amounting to SGD143,566.45 (P5,058,048.84) to Oakwood Asia by way of telegraphic transfer on December 26, 2013. It is finally represented that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal, based on the Sworn Statement issued by the Director of Oakwood Management on July 26, 2013. In reply, please be informed that under Section 42 (A) (2) (a) of the National Internal Revenue Code of 1997 ( "Tax Code" ), as amended, dividends are considered derived within the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources Within the Philippines. (A) Gross Income from Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. The amount received as dividends: (a) From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, 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%)." CIHAED However, under Section 32 (B) (5) of the Tax Code, such dividends 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. " In this regard, paragraphs 1 and 2, Article 10 of the Philippines-Singapore tax treaty provide: "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 Contracting State. 2. However, such dividends may also 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 IDEHCa b) in all other cases, 25 per cent of the gross amount of the dividends." Under Article 10, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines at a rate not to exceed 15 percent if the recipient is a company or a partnership which owns at least 15 percent of the outstanding shares of the voting stock of the company paying the dividends, and during the part of that company's taxable year which precedes the date of payment and during the whole of its prior taxable year (if any). Otherwise, the dividends are subject to 25 percent. Accordingly, considering that Oakwood Asia directly holds 79,195 shares of Oakwood Management representing 99.99 percent of the outstanding shares of the voting stock of Oakwood Management or more than 15 percent since January 14, 2000, such dividend paid by Oakwood Management to Oakwood Asia is subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Singapore 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.