ITAD BIR Ruling No. 218-11

September 1, 2011 ITAD BIR RULING NO. 218-11 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. ITAD-68-10 Punongbayan & Araullo The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Edward L. Roguel Partner, Tax Advisory & Compliance Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 29, 2011, on behalf of your client, Gardenia Bakeries Philippines, Inc. ("Gardenia-Phil") , requesting confirmation that the dividends paid by Gardenia-Phil to Gardenia International(S) Pte. Ltd. ("Gardenia-Singapore") are subject to 15 percent preferential tax rate pursuant to Article 10 of 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 Gardenia-Singapore is a corporation organized and existing under the laws of Singapore and is a resident of Singapore having its registered address at 150 South Bridge Road #09-04 Singapore 058727 based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated December 24, 2010; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 1, 2011; and that, on the other hand, Gardenia-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Gardenia Centre, Star Avenue, Laguna International Park (LIIP) Mamplasan, Bian, Laguna. It is further represented, based on the Secretary's Certificate issued by Gardenia-Phil dated April 26, 2011, that as of record date on December 31, 2010, Gardenia-Singapore, including its nominee shareholders, holds 130,000 Common shares valued at Php130,000,000, representing 100% of the outstanding and voting shares of Gardenia-Phil, and 400,000 Preferred shares valued at Php400,000,000 in Gardenia-Phil; that the subject shares were acquired by Gardenia-Singapore through conversion of loan to equity on November 17, 2004; that on April 14, 2011, the Board of Directors of Gardenia-Phil approved the declaration of cash dividends in the amount of Php24 Million representing three percent (3%) per annum of the total amount of the preferred shares covering the period January 2009 to December 2010, in favor of all preferred shareholders of record of Gardenia-Phil as of December 31, 2010, payable on or before May 31, 2011. HCSEcI 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 proceedings, or judicial appeal per the Certification issued by Gardenia-Phil dated April 26, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: "Section 28. Rates of Income Tax on Foreign Corporations. (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, 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." In this particular case, you invoked Article 10 of the Philippines-Singapore tax treaty. It provides: "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 State. 2. However, such dividends may 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 b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. IEDHAT xxx xxx xxx" Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Considering that Gardenia-Singapore holds 100 percent of the total outstanding and voting shares of Gardenia-Phil during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, the dividends received by Gardenia-Singapore shall be subject to the preferential tax rate of 15 percent, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-68-10 dated December 3, 2010) 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