ITAD BIR Ruling No. 218-12

May 30, 2012 ITAD BIR RULING NO. 218-12 Article 10, Philippines-Germany tax treaty; BIR Ruling No. ITAD-114-11 Castillo Laman Tan Pantaleon & San Jose Law Firm The Valero Tower, 122 Valero Street Salcedo Village, Makati City Attention: Maria Victoria D. Sarmiento Legal Counsel Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on October 7, 2011, on behalf of Boehringer Ingelheim International GmbH ("Boehringer-Germany") , requesting confirmation that the dividend payments of Boehringer Ingelheim (Philippines) Inc. ("Boehringer-Phil") to Boehringer-Germany are subject to a 10 percent preferential withholding tax rate pursuant to Article 10 of the Agreement between the Republic of the Philippines and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital ("Philippines-Germany tax treaty") . It is represented that Boehringer-Germany, with address at Binger Strasse 173, 555216 Ingelheim, Germany, is a corporation organized and existing under the laws of Germany, and is a resident of Germany within the meaning of the Philippines-Germany tax treaty per the Certificate of Residence issued by the German Tax Administration on July 22, 2011; and that, on the other hand, Boehringer-Phil is a corporation duly organized and existing under the laws of the Philippines, with principal address at 23rd Floor, Citibank Tower, 874 Paseo de Roxas, Salcedo Village, Makati City. It is further represented, based on the Secretary's Certificate issued by Boehringer-Phil dated October 3, 2011, that during the meeting of the Board of Directors of Boehringer-Phil held on September 30, 2011, a resolution was passed and approved declaring cash dividends in favor of the stockholders of Boehringer-Phil as of December 31, 2010, in the amount of Ninety-Four Million Thirteen Thousand Eight Hundred Ninety-Seven Philippine Peso (P94,013,897.00), out of the unrestricted retained earnings of the latter as of December 31, 2010; that as of September 30, 2011, Boehringer-Germany has 100 percent ownership of the subscribed and paid-up capital of Boehringer-Phil in the amount of Php240,000,000.00, and which shares were acquired by Boehringer-Germany on various dates beginning April 14, 1981; and that per the Certification dated March 27, 2012 issued by Deutsche Bank AG Manila, payments of the subject dividends were remitted to Boehringer-Germany on October 26, 2011. It is finally represented, based on the Certificate issued by Boehringer-Phil on October 5, 2011, that the transaction subject of the 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 of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It provides: cCaSHA "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%). xxx xxx xxx" 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. xxx xxx xxx" In this particular case, the Philippines-Germany tax treaty, which you invoked may apply. 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 the tax so charged shall not exceed: (a) 10 percent of the gross amount of the dividends if the recipient is a company (excluding partnerships) which owns directly at least 25 percent of the capital of the company paying the dividends; (b) in all other cases, 15 percent of the gross amount of dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other 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 income derived by a sleeping partner from his participation as such and distributions on certificates of an investment-trust. aETDIc xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Germany at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the capital of the company paying the dividend. Accordingly, considering that Boehringer-Germany owns 100 percent of the subscribed and paid-up capital of Boehringer-Phil, this Office is of the opinion and so holds that the dividend payment of Boehringer-Phil to Boehringer-Germany is subject to the 10 percent preferential tax rate pursuant to the Philippines-Germany tax treaty. (BIR Ruling No. ITAD-114-11 dated April 11, 2011) 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