ITAD BIR Ruling No. 229-13

August 15, 2013 ITAD BIR RULING NO. 229-13 Article 10, Philippines-Switzerland Tax Treaty Navarro Amper & Co. 19th Floor Net Lima Plaza, 5th Avenue cor. 26th Street, Bonifacio Global City, Taguig Attention: Richard R. Lapres Representative Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 20 November 2012 ,requesting confirmation that dividends paid by UBS Securities Philippines, Inc. ("UBS PH") to UBS AG ("UBS"),are subject to the preferential tax rate of ten percent (10%) pursuant to Article 10 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 TADCSE It is represented that UBS is a corporation organized and existing under the laws of Switzerland and is a resident thereof with principal address at Aeschenvorsradt 1,40051 Basel and Bahnoftstrasse 45, 8001 Zrich, Switzerland, as evidenced by the Certificate of Residence issued on 24 September 2012; that UBS is not registered as a corporation or partnership in the Philippines, as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission (SEC),dated 19 October 2012, instead the registered company is UBS AG Philippine Representative Office ("UBS PRO") ;and that, on the other hand, UBS PH is a corporation organized and existing under the laws of the Philippines with principal address at 19th Floor Tower One and Exchange Plaza, Ayala Triangle, Ayala Avenue, Makati City. It is further represented that the dividends from UBS PH to be paid to UBS is not connected to UBS PRO, as evidenced by a sworn statement executed by the President and Assistant Treasurer of UBS PH on 02 May 2013. It is further represented, as certified by the Corporate Secretary of UBS PH, executed on 08 October 2012 that, during the Organizational and First Quarter 2012 Meeting of its Board of Directors meeting held on 25 May 2012, they declared cash dividends in the aggregate amount of Two Hundred Twenty Million Seven Hundred Eighteen Thousand Five Hundred Five Philippine Peso (PhP220,718,505);and that UBS holds One Million Eight Hundred Ninety-Nine Thousand Nine Hundred Ninety-Five (1,899,995) common shares of UBS PH, with an aggregate amount of One Hundred Eighty-Nine Million Nine Hundred Ninety-Nine Thousand Five Hundred Philippine Peso (PhP189,999,500.00),that UBS owns 99.99% of the total outstanding capital stock of UBS PH. It is further represented that UBS PH paid the subject dividends through the bank facility of Deutsche Bank AG Manila Branch ("Deutsche Bank Manila") ,by Telegraphic Transfer with UBS as beneficiary in the amount of USD Four Million Eight Hundred Thirty-Seven Thousand Nine Hundred Fifty-Five & 32/100 (USD4,837,955.32),or Php One Hundred Ninety-Eight Million Six Hundred Forty-Six Thousand Four Hundred Forty-Four & 39/100 (Php198,646,445.39) on 06 December 2012 as evidenced by an application for purchase of foreign exchange and payment order receipt from Deutsche Bank Manila dated 06 December 2012. ACcEHI It is further represented that the remittance corresponding to 1,900,000 outstanding shares was made based on the shareholding structure, where, 1,899,995 shares are held by UBS and 5 shares are held in trust for UBS by directors who are employees of UBS Group, which therefore did not entitle these directors to an unconditional right to the dividends, as evidenced by an Affidavit executed on 17 December 2012 by the President and Treasurer of UBS PH. 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, Head of Finance and Director, Head of Compliance of UBS PH executed on 19 October 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, dividends paid to UBS are subject to income tax at the rate of 30%,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 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." n 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: ISTECA "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: "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." TSacID 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 percent if the company recipient of the dividends holds directly at least 10 percent of the outstanding shares of the capital of the company paying the dividends. However, the preferential tax rate shall not apply if the Swiss corporation has a permanent establishment in the Philippines and the subject dividend income is effectively connected to the said permanent establishment. Article five (5) of the Philippines-Switzerland tax treaty defines "permanent establishment" as: "Article 5 Permanent Establishment 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop; f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; g) a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than six months; DcaSIH h) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve-month period. xxx xxx xxx" As culled from the records, UBS has a branch here in the Philippines UBS PRO. Whether the dividends paid by UBS PH to UBS are considered to have been made through a permanent establishment here in the Philippines, the relevant commentaries of the Organisation for Economic Co-operation and Development ("OECD") Model Tax Convention on Income and on Capital 2 provide: "... the right to tax of the State where the permanent establishment is situated does not extend to profits that the enterprise may derive from that State but that are not attributable to the permanent establishment. This is a question on which there have historically been differences of view, a few countries having some time ago pursued a principle of general "force of attraction" according to which income such as other business profits, dividends, interest and royalties arising from sources in their territory was fully taxable by them if the beneficiary had a permanent establishment therein even though such income was clearly not attributable to that permanent establishment. Whilst some bilateral tax conventions include a limited anti-avoidance rule based on a restricted force of attraction approach that only applies to business profits derived from activities similar to those carried on by a permanent establishment, the general force of attraction approach described above has now been rejected in international tax treaty practice. The principle that is now generally accepted in double taxation conventions is based on the view that in taxing the profits that a foreign enterprise derives from a particular country, the tax authorities of that country should look at the separate sources of profit that the enterprise derives from their country and should apply to each the permanent establishment test, subject to the possible application of other Articles of Convention. This solution allows simpler and more efficient tax administration and compliance, and is more closely adapted to the way in which business is commonly carried on. ..." (emphasis ours) In the same vein, the Supreme Court in the case of Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals 3 held that: SITCEA "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not the branch .Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis ours) Hence, based on the foregoing, the income paid to the head office of a foreign corporation which has a branch office in the Philippines shall not be subject to the preferential tax rate if the income is not effectively connected to the said branch office. However, if the business transactions that give rise to the income came from a separate and independent transaction/source from the branch office here in the Philippines, it shall be subject to the preferential tax rate under the tax treaty. In this case, it was represented that UBS PRO is not privy and does not have any participation whatsoever in the holding of UBS's shares of stocks in UBS PH. Therefore, applying the rules enunciated above, such dividends paid by UBS PH to UBS cannot be considered as effectively connected with UBS PRO. Further, since UBS holds directly more than 10% of the outstanding capital stock of UBS PH (in fact, 99.99% of the said shares), the dividends paid by UBS PH to UBS are subject to income tax at the rate of 10% 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. cEHSTC 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. 2. OECD Model Tax Convention on Income and on Capital, Condensed Version, Eighth Edition, 2010, p. 157. 3. G.R. No. 76573 dated September 14, 1989. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.