ITAD BIR Ruling No. 245-11

November 9, 2011 ITAD BIR RULING NO. 245-11 Article 10 (2) (a) Philippines-Netherlands tax treaty Manabat Sanagustin & Co. The KPMG Center, 9th Floor 6787 Ayala Avenue Makati City, Philippines Attention: Herminigildo G. Murakami Principal, Tax Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on June 7, 2011 requesting confirmation that the dividends paid to DP World Mabuhay First B.V. ("DP World") by Morray Holdings, Inc. ("Morray Holdings") are subject to the preferential tax rate of 15 percent pursuant to Article 10 of the Convention between the Republic of the Philippines and the Government of the Kingdom of the Netherlands or the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that DP World is a corporation duly organized and existing under the laws of the Netherlands with principal business address at Albert Plesmanweg 43G, 3088, based on the Declaration of Residence issued by the Tax and Custom Administration of the Netherlands on November 15, 2011; that DP World has an authorized capital stock amounting to EUR90,000 divided into 90,000 shares; that DP World is not registered as a corporation or as a partnership in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission on November 23, 2010; and that, on the other hand, Morray Holdings is a corporation organized and existing under the laws of the Philippines, with principal address at 7th Floor PhilFirst Building, 6764 Ayala Avenue, Makati City, Philippines. It is further represented in the Secretary's Certificate dated June 1, 2011 that on May 30, 2010, the Board of Directors of Morray World approved the declaration of a cash dividends in the amount of Php29,630,000,000.00 in favor of the stockholders of record as of May 31, 2011 payable on June 15, 2011; that as of the date of payment of the dividends, DP World holds 240,000 common shares of Morray World, with a par value of Php10 each, and equivalent to .59 percent of the total and outstanding shares of Morray World; and that these shares were acquired and held by DP World since June 24, 2010. HCaIDS It is finally represented that the issue or 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, per Certification issued by the Corporate Secretary of Morray World on April 1, 2011. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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%)." However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It 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." Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides: ITScAE "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the 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 recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. 3. The competent authorities of the States shall by mutual agreement settle the mode of application of paragraph 2. 4. The provisions of paragraph 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 5. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the foregoing provisions, the Philippines may tax the dividends paid by a resident company to a company which is a resident of the Netherlands at a rate not exceeding 10 percent if the last-mentioned company, the capital of which is wholly or partly divided into shares, holds directly at least 10 percent of the capital of the company paying the dividends. In all other cases, the rate of 15 percent applies. Such being the case and considering that DP World is a company, the capital of which is wholly or partly divided into shares, and which holds .59 percent of the capital of Morray Holdings , this Office is of the opinion and so holds that the dividend payments by Morray Holdings to DP World shall be subject to the preferential tax rate of 15 percent based on the gross amount thereof, pursuant to Article 10 (2) (b) of the Philippines-Netherlands tax treaty. This ruling is issued on the basis of the foregoing 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. CcTIDH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue