ITAD BIR Ruling No. 228-13

August 15, 2013 ITAD BIR RULING NO. 228-13 Article 10, Philippines-Switzerland Tax Treaty Salvador & Associates 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Ave. 1226 Makati City Attention: Atty. Adan T. Delamide Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 23 November 2012 ,requesting confirmation that the cash dividend paid by Nestl Philippines, Inc. ("Nestl PH") to Nestl S.A. ("Nestl") ,is subject to the preferential tax rate of 10 percent (10%) pursuant to Article 10 (2) (a) of The Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . 1 HDaACI It is represented that Nestl is a corporation organized and existing under the laws of Switzerland and is a resident thereof with business address at Avenue Nestl 55, 1800, as evidenced by the Certificate of Residence dated 20 June 2012, which was authenticated by the Consul of the Republic of the Philippines in and for Switzerland dated 04 July 2012; that Nestl 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 dated 24 November 2011; and that, on the other hand, Nestl PH is a corporation organized and existing under the laws of the Philippines with business address at Barangay Niugan, Cabuyao, Laguna. It is further represented, as certified by the Corporate Secretary of Nestl PH, executed on 21 November 2012, that in a special meeting of the Board of Directors of Nestl PH held on 21 November 2012, the latter declared cash dividends equivalent to Four Billion Five Hundred Million Philippine Pesos (Php4,500,000,000.00) for all stockholders on record as of same date of the meeting; that as of 21 November 2012, Nestl ,holds 23,009,265 shares of stock of Nestl PH, amounting to Php2,300,926,500 or equivalent to 99.99% of its outstanding capital stock. It is further represented that the payment of the subject dividend was made by Nestl PH to Nestl ,through The Hongkong and Shanghai Banking Corporation Limited ("HSBC") in the amount of Ninety Eight Million Nine Hundred Ninety Four Thousand Three Hundred Eighty Six and 15/100 United States Dollars (USD98,994,386.15) on 07 December 2012, as evidenced by the Certification issued by HSBC executed on 19 December 2012. It is finally represented that the dividends subject of this TTRA are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Certification issued by the Director and Corporate Secretary of Nestl PH executed on 21 November 2012. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended, the dividend payment to Nestl is subject to income tax at the rate of 30 percent, thus: ADaECI "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 percent (30%) 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." * However, under Section 32 (B) (5) of the Tax Code, such 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." With respect to a treaty, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1 and 2 of Article 10 thereof provide: TIHDAa "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 also be taxed in the Contracting 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases." Under paragraph 2 (a) of Article 10, dividends arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed 10% of the gross amount of the dividends if the company recipient of the dividends has a capital which is wholly or partly divided into shares and which holds directly at least 10% of the capital of the company paying the dividends. Accordingly, since Nestl holds directly more than 10% of Nestl PH (in fact 99.99%),the dividend paid by Nestl PH to Nestl is subject to income tax at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Switzerland 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. TDAcCa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Its provisions on taxes apply on income derived or which accrued beginning January 1, 2002.