ITAD BIR Ruling No. 257-11

November 10, 2011 ITAD BIR RULING NO. 257-11 Article 9, Philippines-UK tax treaty; BIR Ruling No. ITAD-31-99; BIR Ruling No. 240-83; BIR Ruling No. 157-83; BIR Ruling No. 286-82 SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Antonette C. Tionko Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 28, 2011, on behalf of NEWTON ASIAN INCOME FUND, requesting confirmation that the dividend payments of the PHILIPPINE LONG DISTANCE TELEPHONE COMPANY ("PLDT") to NAIF are subject to the preferential withholding tax rate of 25 percent pursuant to Article 9 of the Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty") . It is represented that NEWTON ASIAN INCOME FUND is a sub-fund of BNY Mellon Investment Funds, an investment company duly incorporated in accordance with the laws of England and Wales with registered address at BNY Mellon Centre, 160 Queen Victoria Street London EC4V 4LA, England per its Instrument of Incorporation; that it is a resident of the United Kingdom ("UK") per Certificate of Residence issued by the HM Inspector of Taxes dated November 23, 2010; that it is not registered as a corporation or as a partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on March 17, 2011; and that PLDT, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with principal office and place of business at Ramon Cojuangco Building, Makati Avenue 1200. It is further represented that on March 1, 2011, the Board of Directors of PLDT declared the following cash dividends out of PLDT's audited unrestricted retained earnings as of December 31, 2010: a) Regular dividend of P78.00 per outstanding share of PLDT's Common Stock, payable on April 19, 2011 to the holders of record on March 16, 2011; and ADEaHT b) Special dividend of P66.00 per outstanding share of PLDT's Common Stock, payable on April 19, 2011 to the holders of record on March 16, 2011; that PLDT also certifies that based on the March 21, 2011 certification issued by HSBC Securities Services, a custodian of various nonresident foreign shareholders of PLDT, BNY Mellon Investment Funds Newton Asian Income Fund is a beneficial holder of PLDT common shares as of March 16, 2011; that HSBC Securities Services further certifies that BNY Mellon Investment Funds Newton Asian Income Fund has 1,000,000 common PLDT shares valued at P2,070,000,000.00 and which constitute 0.5355 percent ownership in PLDT; and that the issue or transaction subject of this request or ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal as per certification issued by PLDT's representative on May 26, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (" Tax Code ") of 1997, 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 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%)." ISEHTa However, under Section 32 (B) (5) of the Tax Code of 1997, as amended, such income derived by a nonresident foreign corporation 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 states: "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." AacCHD Hence, the provisions of Article 9 of the Philippines-UK tax treaty, which you invoked, may apply. It provides: "Article 9 DIVIDENDS 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) In all other cases 25% of the gross amount of the dividends. xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company." xxx xxx xxx Based on the foregoing provisions, dividends paid to a company which is a resident of the UK will be taxed at a preferential tax rate not exceeding 15 percent of the gross amount of dividends if the recipient is a company that owns at least 10 percent of the voting power in the company paying the dividends, and a rate not exceeding 25 percent of the gross amount of the dividends in all other cases. In view thereof, and considering that Newton Asian Income Fund holds only 1,000,000 common PLDT shares constituting only 0.5355 percent of the issued and outstanding capital stock of PLDT as of March 16, 2011, which is less than the required minimum shareholdings of 10 percent, this Office is of the opinion, and hereby holds, that the said dividends paid by PLDT to Newton Asian Income Fund are subject to the 25 percent preferential tax rate prescribed under Article 9 (l) (b) of the Philippines-UK tax treaty (BIR Ruling No. 070-81 dated April 8, 1981; BIR Ruling No. 157-83 dated August 2, 1983; BIR Ruling No. 013-97 dated February 5, 1997). 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. cDCEHa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue