ITAD BIR Ruling No. 217-15

July 10, 2015 ITAD BIR RULING NO. 217-15 Article 9 (Dividends), Philippines-United Kingdom tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Ave., Makati City 1226 Attention: Antonette C. Tionko Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 27 September 2012 requesting confirmation that the dividends paid by Energy Development Corporation ("EDC-Philippines") to Newton Asian Income Fund ("Newton-UK") are subject to the preferential tax treaty rate of 25 percent pursuant to the Convention between the Government 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"). It is represented that Newton-UK is a non-resident foreign corporation organized and existing under the laws of the United Kingdom based on the consularized and notarized Certificate of Residency issued by the HM Revenue & Customs of the United Kingdom and consularized and notarized Instrument of Incorporation. The company Newton-UK is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on 17 March 2011. On the other hand, EDC-Philippines , is a domestic corporation organized and existing under Philippine laws. It is further represented that Newton-Philippines owns One Hundred Fifty Million (150,000,000) common shares representing 0.533333% of the authorized capital stock of EDC-Philippines acquired by way of purchase on various dates based on notarized Secretary's Certificate from EDC-Philippines. It is further represented that on 05 September 2012, EDC-Philippines declared cash dividends in the amount of Four Centavos (Php0.04) per share out of the unrestricted retained earnings as of 30 June 2012 in favour of stockholders as of 20 September 2012 based on the notarized Secretary's Certificate from EDC-Philippines. 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, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Sworn Statement from EDC-Philippines. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Newton-UK 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: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)". TAacHE 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 Kingdom tax treaty. Paragraph 1, sub-paragraphs (a) and (b) of Article 9 on Dividends thereof provide: "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: 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; DHIcET b) in all other cases 25% of the gross amount of the dividends. 2. Dividends derived from a company which is a resident of the United Kingdom by a resident of the Philippines may be taxed in the Philippines. Such dividends may also be taxed in the United Kingdom and according to the laws of the United Kingdom, but where such dividends are beneficially owned by a resident of the Philippines the tax so charged shall not exceed: 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the United Kingdom may be taxed in the Philippines at a rate (a) not to exceed 15% if the company recipient of the dividends holds directly at least 10% of the voting shares of the paying company; and (b) 25% in all other cases. Considering that Newton-UK owns 0.533333% of the shares in EDC-Philippines , the dividends paid by EDC-Philippines to Newton-UK are subject to the preferential tax rate of 25 percent of the gross amount thereof pursuant to Article 9, paragraph 1, sub-paragraph (b) 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.