ITAD BIR Ruling No. 255-11

November 10, 2011 ITAD BIR RULING NO. 255-11 Article 11, Philippines-US Tax Treaty; BIR Ruling No. 058-84; BIR Ruling No. DA-ITAD-077-02 The Hongkong and Shanghai Banking Limited Corporation 7/F HSBC Centre, 3058 Fifth Avenue West Bonifacio Global City Taguig City 1634 Attention: Ms. Karina M. Figueroa Assistant Vice-President Gentlemen : This refers to your tax treaty relief application filed on April 18, 2011, on behalf of Emerging Markets Growth Fund, Inc. ("EMGFI") , requesting confirmation that the dividend payments made by Energy Development Corporation ("EDC") to EMGFI 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 with Respect to Taxes on Income. ("Philippines-US tax treaty") . It is represented that EMGFI, with address at 11100 Santa Monica Boulevard, 15th Floor Los Angeles, CA, 90025, United States of America (US), is a resident of the US for purposes of US taxation based on the Certificate of Residency issued by the Internal Revenue Service dated April 4, 2011; that EMGFI 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 Securities and Exchange Commission on May 17, 2011; and that, on the other hand, EDC is a domestic corporation duly organized and existing under Philippine laws located at the Energy Center, Merritt Road Fort Bonifacio, Taguig City; and that EDC is registered with the Board of Investments with Registration No. 2004-056 issued on May 12, 2004. It is also represented that at a meeting held on March 15, 2011, the Board of Directors of EDC has approved the declaration of cash dividends of Php0.0008 per share out of its unrestricted retained earnings as of December 31, 2010 in favor of holders of preferred shares as of March 29, 2011, payable on or before April 22, 2011, and a regular cash dividend of Php0.16 per share out of the unrestricted retained earnings as of December 31, 2010 in favor of holders of common shares as of the March 29, 2011, payable on or before April 22, 2011. EHSTcC It is further represented, per Certification dated July 21, 2011 issued by JP Morgan Chase Bank N.A. ("JPMorgan") , a global securities custodian which provides custodial, settlement and other associated services, that JP Morgan safekeeps the securities of its underlying clients with the Hongkong and Shanghai Banking Corporation Limited ("HSBC") one of which is EMGFI; that as of March 21, 2011, EMGFI is the beneficial owner of 630,720,750 common shares of EDC held in the name of JP Morgan as Global Custodian, and are safekept with HSBC in the Philippines; and that the value of said shares amounts to Php3,784,324,500.00 constituting 0.022426% shares in EDC per the Secretary's Certificate issued by EDC dated April 15, 2011. It is finally represented, based on the Sworn Statement by the same Corporate Secretary on April 8, 2011, that the 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 of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ( Tax Code ), 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%). HIETAc xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt or partially exempt from income tax to the extent required by any treaty obligation binding upon the Philippine Government, 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. xxx xxx xxx" With respect to a treaty, what you invoke for this purpose is the Philippines-US tax treaty. Its Article 11 provides: "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 ICaDHT (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 provision, dividends arising in the Philippines and paid to a resident of the US may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 25 percent of the gross amount of dividends; and (b) 20 percent if the corporation holds directly at least 10 percent of the outstanding shares of the voting stock of capital of the company paying the dividends. In view of the foregoing, since EMGFI holds less than 10 percent of the outstanding shares of EDC, this Office is of the opinion and so holds that the cash dividends to be received by EMGFI from EDC are subject to preferential tax rate of 25 percent of the gross amount of the dividends 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-090-11 dated March 17, 2002) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the 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