ITAD BIR Ruling No. 247-14

October 9, 2014 ITAD BIR RULING NO. 247-14 Article 10 (Dividends), Philippines-Singapore tax treaty Gardenia Bakeries (Philippines), Inc. Gardenia Centre, Star Avenue Laguna International Industrial Park (LIIP) Mamplasan, Bian 4038, Laguna Attention: Simplicio P. Umali Jr. General Manager Gentlemen : This refers to your tax treaty relief application filed on May 23, 2014 requesting confirmation that dividend paid by Gardenia Bakeries Philippines, Inc. ("Gardenia Philippines ") to Gardenia International (S) Pte. Ltd. ("Gardenia International") are subject to a preferential rate of 15 percent pursuant to the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty"). It is represented that Gardenia International is a corporation organized and existing under the laws of Singapore based on its Memorandum and Articles of Association, and with principal office at 150 South Bridge Road, #09-04 Fook Hai Building, Singapore. Gardenia International is a resident of Singapore for income tax purposes for the Year of Assessment 2014 based on its Certificate of Residence issued by the Inland Revenue Authority of Singapore on May 7, 2014. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration issued by the Securities and Exchange Commission on April 24, 2013. On the other hand, Gardenia Philippines is a domestic corporation with principal office at Gardenia Centre, Star Avenue, Laguna International Industrial Park (LIIP), Mamplasan, Bian 4038, Laguna, Philippines. It is also represented based on the Corporate Secretary's Certificate issued on April 21, 2014 that, as of December 31, 2014, Gardenia International holds 100 percent of the total shares of stock of Gardenia Philippines as described below: DcaECT Stockholder Type of Number and Par Mode of Acquisition Percentage of Shares Value of Shares Acquisition Date Ownership Gardenia Common 130,000 Original November 27 percent International Issuance 17, 2004 Preferred 360,000 Conversion 73 percent Total 490,000 100 percent (P490,000,000.00) ============== It is further represented based on the same Corporate Secretary's Certificate that in a special meeting of the Board of Directors of Gardenia Philippines on March 28, 2014, the Board approved a resolution declaring cash dividends amounting to P10,800,000.00 representing 3% per annum of the total amount of the preferred shares covering the period January 1, 2013 to December 31, 2013, in favor of all preferred shareholders of record as of December 31, 2013, payable on or before May 31, 2014. 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 Sworn Statement issued by the Financial Controller of Gardenia Philippines on April 30, 2014. In reply, please be informed that under Section 42 (A) (2) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended, dividends are considered derived within the Philippines if paid by a domestic corporation, to wit: "SEC. 42. Income from Sources within the Philippines. (A) Gross Income from Sources within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines: xxx xxx xxx (2) Dividends. From a domestic corporation; and" Moreover, under Section 28 (B) (1) of the Tax Code, dividends paid to a foreign corporation not engaged in trade or business in the Philippines are subject to income tax at the rate of 30 percent, to wit: "SEC. 28. Rates of Income Tax on Foreign Corporations. ITCcAD 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, such dividends exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: "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." In this regard, paragraphs 1 and 2, Article 10 of the Philippines-Singapore tax treaty 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 Contracting State. aTcIEH 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 law of that State, 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 (including partnership) and during the part of the paying company'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 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends." Under Article 10, dividends arising in the Philippines and paid to a resident of Singapore may be taxed in the Philippines at a rate not to exceed 15 percent if the recipient is a company or a partnership which owns at least 15 percent of the outstanding shares of the voting stock of the company paying the dividends, and during the part of that company's taxable year which precedes the date of payment and during the whole of its prior taxable year (if any). Otherwise, the dividends are subject to 25 percent. Accordingly, considering that Gardenia International owns at least 15 percent of the outstanding shares of the voting stock of Gardenia Philippines during the part of the company's taxable year which precedes the date of payment and during the whole of its prior taxable year, where Gardenia International owns 27 percent of the outstanding shares of voting stock of Gardenia Philippines since November 17, 2004 up to present, such dividends paid by Gardenia Philippines to Gardenia International shall be subject to income tax at the rate of 15 percent pursuant to paragraph 2 (a), Article 10 of the Philippines-Singapore 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue