ITAD BIR Ruling No. 257-12

June 11, 2012 ITAD BIR RULING NO. 257-12 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas, 1226 Makati City Attention: Atty. Mary Assumption S. Bautista-Villareal Principal, Tax Gentlemen : This refers to your tax treaty relief application filed on December 21, 2010, filed on behalf of JARDINE MATHESON EUROPE B.V. ("Jardine") , requesting confirmation that dividends paid by JARDINE DISTRIBUTION INC. ("Jardine Distribution") to Jardine are subject to 10 percent preferential tax rate pursuant to the Convention between the Kingdom of The Netherlands and the Republic of the Philippines for 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 Jardine is a nonresident foreign corporation organized and existing under the laws of the Netherlands as shown in the Extract from the Trade Register of the Chambers of Commerce of Netherlands and a resident thereof based on the Declaration of Residence issued by the Tax and Customs Administration of the Netherlands on October 25, 2010; that Jardine has an authorized capital of EUR100,000.00 which is divided into 100,000 ordinary shares of stock, each with a par value of 1 Euro; that Jardine is situated at Diepenbrockstraat 19, 1077 VX Amsterdam, Netherlands; that Jardine is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on November 2, 2010; and that, on the other hand, Jardine Distribution is a domestic corporation situated at 2nd Floor, Jardine Building, JM Compound Faraday corner Osmea Highway, Makati City, Philippines. It is further represented that on December 15, 2010, the Board of Directors of Jardine Distribution , at a meeting, approved the declaration of cash dividends in the amount of P50,000,000.00 from the unrestricted retained earnings, based on the unaudited accounts as of November 30, 2010, on the 535,000 presently subscribed and outstanding shares of common stock of Jardine Distribution , to stockholders of record as of November 30, 2010, payable on December 22, 2010, based on the Secretary's Certificate issued by the Corporate Secretary of Jardine Distribution on December 17, 2010; that as of the date of record and date of payment of the dividends, Jardine wholly owned Jardine Distribution with 535,000 common shares with a par value of P100.00 each, or a total of P53,500,000.00 worth of shares; that these shares were acquired on December 29, 2005 through sale from Jardine Davies, Inc., based on the Certification issued by the same Corporate Secretary on December 17, 2010. It is finally represented that the dividends subject of this ruling are 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 Jardine Distribution on December 17, 2010. IaSCTE In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends payable to Jardine , a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: "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%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code provides that such dividends may be exempt from income tax or subject to reduced rate to the extent required by any treaty obligation on the Philippines, viz. : "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, you invoke the Philippines-Netherlands tax treaty. Paragraphs 1 and 2, and 5, Article 10 thereof, provide: "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: SDTIaE 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. xxx xxx xxx 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 aforequoted provisions, dividends arising in the Philippines and paid to a resident of the Netherlands may be taxed in the Philippines at a rate not to exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. Accordingly, since Jardine is a company whose capital is divided into shares and it wholly owns Jardine Distribution , the dividends to be paid by Jardine Distribution to Jardine are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 10 of the Philippines-Netherlands tax treaty. [BIR Ruling No. ITAD-99-08 dated November 17, 2008; BIR Ruling No. ITAD-46-10 dated May 11, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010] 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 of Internal Revenue