ITAD BIR Ruling No. 256-15

September 8, 2015 ITAD BIR RULING NO. 256-15 Article 10, Philippines-Singapore tax treaty JG Law Attorneys & Counsellors at Law SOL Building, 112 Amorsolo Street Legaspi Village, 1229 Makati City Attention: Jose V. E. Jimenez Pamela Ann T. Cayabyab Olivia P. Taganas Gentlemen : This refers to your tax treaty relief application filed on May 29, 2014, on behalf of Brother International Singapore Pte. Ltd. ("BISPL") , requesting confirmation that the dividend paid by Brother International Philippines Corporation ("BICP") to BISPL is subject to 15 percent preferential tax rate pursuant to Article 10 of 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 BISPL is a corporation organized and existing under the laws of Singapore, and is a resident thereof based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated April 29, 2014; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 29, 2014; and that, on the other hand, BICP is a corporation organized and existing under the laws of the Philippines. It is further represented that at the special meeting of the Board of Directors BICP held on May 7, 2014, the Board of Directors of BICP declared cash dividend in the amount of Twelve Million One Hundred Fifty-Two Thousand Two Hundred Fifty-One Pesos (Php12,152,251.00) from out of the unappropriated retained earnings as of March 31, 2014, to be paid on May 31, 2014 to BICP's stockholders of record as of May 7, 2014; that as of record date and the date of payment of the dividend, BISPL is the legal and beneficial owner of 219,990 common shares with a total par value of Php219,990,000.00, which represents 100% ownership in BICP (including the individual stockholders being trustees/nominees of BISPL); that the said shares was acquired by BISPL through various dates of acquisition beginning April 11, 2001. It is finally represented that the issue or transaction subject of this 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 the Sworn Statement issued by BICP dated May 28, 2014. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, 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 . (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, 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: 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 particular case, you invoked Article 10 of the Philippines-Singapore tax treaty. It provides: CAIHTE "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. However, such dividends may 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. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. xxx xxx xxx 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Considering that BISPL, a resident of Singapore with no fixed place of business in the Philippines, holds 100 percent ownership of BICP during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year or since April 11, 2001, the dividend paid by BICP to BISPL is subject to the preferential tax rate of 15 percent, pursuant to Article 10 (2) (a) 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. DETACa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue