ITAD BIR Ruling No. 244-14

October 9, 2014 ITAD BIR RULING NO. 244-14 Article 10, Philippines-Malaysia tax treaty Bernaldo Directo & Po Law Offices Unit 1807 Cityland Condominium 10 Tower 1 6815 H.V. dela Costa corner Ayala Avenue, Makati City Attention: Yew Ming Leong Gentlemen : This refers to your tax treaty relief application (TTRA) filed on July 3, 2012 requesting for confirmation that the dividends paid by EM Maju Asia, Inc. ("EM PH") to EM Maju Sdn Bhd ("EM ML") are subject to preferential income tax rate of 15 percent pursuant to Agreement between the Government of the Republic of the Philippines and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. ("Philippines-Malaysia tax treaty"). It is represented that EM ML is a foreign corporation organized and existing under the laws of Malaysia and is a resident thereof with principal address at the 5th Floor, No. 61 Jalan Raja Adullah Kampung Baru 50300 Kuala Lumpur, Malaysia based on the Certificate of Residence issued by the Headquarters of Inland Revenue Board of Malaysia, Department of International Taxation on July 5, 2012; that EM ML is not registered as corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on June 21, 2012; that, on the other hand, EM PH is a domestic corporation with principal business address at Unit 205 & 207, Cityland 10 Tower II, Dela Costa Street Salcedo Village, Makati City. It is further represented that during a special meeting of the Board of Directors of EM PH on June 27, 2012, EM PH declared cash dividends amounting to PhP320,000.00 to its stockholders of record as of December 31, 2011; that as of even date, EM ML holds 9,998 Class B shares with a total par value of PhP624,875.00, or 97.637% in EM PH, based on the Certificate issued by the Corporate Secretary of EM PH on June 27, 2012; and that, said dividends were paid to EM ML by EM PH on July 9, 2012 based on the Customer Credit Transfer issued by Banco de Oro on even date. It is finally represented that the issue or transaction subject of the above application is 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 authorized representative of EM PH on June 27, 2012. DSAEIT In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, provides that dividends derived by non-resident foreign corporations not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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 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): 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 same Code provides that such dividends may be exempt from income tax or partially exempt (if subject to a reduced rate only) to the extent required by any treaty obligation on the Philippines, thus: "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. cTDECH xxx xxx xxx" For this purpose, you invoke the Philippines-Malaysia tax treaty. Paragraphs 1 and 2, 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. Dividends paid by a company which is a resident of the Philippines to a resident of Malaysia who is subject to tax in Malaysia in respect thereof, may be taxed in the Philippines in accordance with the laws of the Philippines 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; b) in all other cases, 25 per cent of the gross amount of the dividends. xxx xxx xxx " (emphasis supplied) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Malaysia may be taxed in the Philippines at a rate not to exceed a) 15 per cent of the gross amount of the dividends if the recipient is a company; b) in all other cases, 25 per cent of the gross amount of the dividends. Accordingly, since EM is a company which is a resident of Malaysia, such dividends paid by EM PH to EM ML are subject to a preferential tax rate of 15 percent pursuant to paragraph 2 (a), Article 10 of the Philippines-Malaysia tax treaty. HIETAc 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 Bureau of Internal Revenue