ITAD BIR Ruling No. 257-14

October 10, 2014 ITAD BIR RULING NO. 257-14 Article 10 (Dividends) Philippines-Singapore tax treaty Agcaoili & Associates Attorneys-At-Law 7th Floor, Citibank Center Paseo de Roxas, Makati City Attention: Ma. Carmen Agcaoili-Orena Gentlemen : This refers to your tax treaty relief application filed on January 2, 2014 requesting confirmation that dividend paid by Essilor Philippines Optical Distribution, Inc. ("EPODI") to Essilor Philippines Holdings Pte. Ltd. ("EPHPL") 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 EPHPL is a corporation organized and existing under the laws of Singapore based on its Memorandum of Association, and with principal office at 215 Kallang Bahru, #06-00 Singapore. EPHPL 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 November 25, 2013. 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 December 19, 2013. On the other hand, EPODI is a domestic corporation with principal office at 4th Floor Shoppers Gold Building, 464 Rizal Avenue, Quiapo, Manila, Philippines. It is also represented based on the Corporate Secretary's Certificate issued on December 27, 2013 that, as of November 18, 2013, EPHPL holds 649,995 shares of EPODI which constitute 99.99% ownership in EPODI. EPHPL holds these shares since October 2007. It is further represented based on same Corporate Secretary's Certificate that in a special meeting of the Board of Directors of EPODI on November 18, 2013, the Board approved a resolution declaring cash dividends amounting to P80,000,000.00 to all stockholders of record as of November 18, 2013 and payable on January 31, 2014. On February 17, 2014, EPODI remitted such dividend to EPHPL amounting to US$1,497,863.34. AICTcE 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 Certification of No Pending Case issued by the Corporate Secretary of EPODI on July 1, 2014. In reply, please be informed that under Section 42 (A) (2) (a) 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. The amount received as dividends: (a) 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. 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: n 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: ATESCc "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. 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 EPHPL owns at least 15 percent of the outstanding shares of the voting stock of EPODI 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 EPHPL owns 40 percent of the outstanding shares of EPODI since October 2007 up to present, such dividend paid by EPODI to EPHPL is 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. EICSDT Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.