ITAD BIR Ruling No. 241-11

November 3, 2011 ITAD BIR RULING NO. 241-11 Article 11, Philippines-US tax treaty; BIR Ruling No. 058-84; BIR Ruling No. DA-ITAD-077-02 Philippine Long Distance Telephone Company Ramon Cojuangco Building Makati Avenue 1226 Makati City Attention: Charito R. Villena Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on April 14, 2011 on behalf of OPPENHEIMER DEVELOPING MARKETS FUND ("ODMF"), requesting confirmation that the dividends paid by the PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ("PLDT") to ODMF are subject to 25 percent preferential tax rate, pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains (Philippines-US tax treaty). It is represented that ODMF, with registered office at 6803 South Tucson Way, Centennial, Colorado 80112, is a corporation duly organized and existing under the laws of and is a resident of the United States of America ("US") within the meaning of the Philippines-US tax treaty per certification by the US Internal Revenue Service dated March 30, 2011; that it is not registered as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Philippine Securities and Exchange Commission dated June 16, 2011; and that, on the other hand, PLDT is a corporation duly organized and existing under Philippine laws, with office address at Ramon Cojuangco Building, Makati Avenue 1200. It is further represented, based on the Secretary's Certificate issued by PLDT on March 6, 2011, that at a meeting of the Board of Directors on March 1, 2011, the following cash dividends were declared out of PLDT's audited unrestricted retained earnings as of December 31, 2010: a) Regular dividend of P78.00 per outstanding share of PLDT's Common Stock, payable on April 19, 2011 to the holders of record on March 16, 2011; and ADcEST b) Special dividend of P66.00 per outstanding share of PLDT's Common Stock, payable on April 19, 2011 to the holders of record on March 16, 2011. that PLDT also certifies that based on the March 21, 2011 certification issued by HSBC Securities Services, a custodian of various nonresident foreign shareholders of PLDT, ODMF is a beneficial holder of PLDT common shares as of March 16, 2011; that HSBC Securities Services further certifies that ODMF has 1,795,170 common PLDT shares valued at 3,716,001,900.00 and which constitute 0.961236 percent ownership in PLDT; and finally, per the Sworn Statement made by PLDT dated March 28, 2011, the transaction subject of the herein 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 a judicial appeal of the taxpayers 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: "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 . . ., dividends, . . .: 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: cIEHAC 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 relation thereto, Article 11 (2) (a) of the Philippines-US tax treaty, which you invoke, may apply to the instant case. It provides, viz. : "Article 11 DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed: a. 25 percent of the gross amount of the dividend; or b. When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation'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 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. xxx xxx xxx 5. The term 'dividends' as used in this Convention 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 corporation making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends derived by a US resident company from a Philippine company at a rate not exceeding 20 percent if the recipient US company owns at least 10 percent shares of the voting stock of the said Philippine company; and, at a rate not exceeding 25 percent in all other cases. In view of the foregoing, considering that ODMF owns 0.961236 percent common shares in PLDT, this Office is of the opinion and so holds that the dividends derived by ODMF from PLDT are subject to the preferential tax rate of 25 percent of the gross amount thereof, pursuant to Article 11 (2) (a) of the Philippines-US tax treaty. ( BIR Ruling No. 058-84 dated March 9, 1984; BIR Ruling No. ITAD-77-02 dated May 2, 2002 ) TSEAaD 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