ITAD BIR Ruling No. 257-15

September 8, 2015 ITAD BIR RULING NO. 257-15 Article 10, Philippines-Italy tax treaty O & G Leather Mftg. Corp. Bldg. 4A 1-2 Philexcel Business Park Clark Freeport Zone, Pampanga Attention: Arlene D. Singca Finance Assistant Gentlemen : This refers to your tax treaty relief application filed on July 23, 2012, requesting confirmation that dividends paid by O & G Leather Mftg. Corp. ("O & G") to Fabrizio Occhipinti ("Mr. Occhipinti") are subject to preferential tax rate of 15 percent pursuant to Article 10 of the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and the Prevention of Fiscal Evasion ( "Philippines-Italy tax treaty" ). It is represented that Mr. Occhipinti is a resident individual under the laws of Italy, and is a resident of Italy within the meaning of the Philippines-Italy tax treaty based on the Attestato Di Residenza, Modelo Certificado De Residencia issued on April 6, 2012 by Agenzia Entrate, Direzione Provinciale I di Roma; that based on verification by the Department of Trade & Industry dated June 25, 2012, Mr. Occhipinti is not registered to engaged in business in the Philippines; and that, on the other hand, O & G is a corporation organized and existing under the laws of the Philippines. It is further represented, that on May 28, 2012, the Board of Directors of O & G adopted a resolution declaring cash dividends amounting to Php22,000,000.00 to be proportionately divided in accordance with the numbers of shares owned by all stockholders as of December 31, 2011; that as of record date and as of the date of payment of the dividends, Mr. Occhipinti owns 20,000 shares of stock with a total par value of Php2,000,000.00 which represents 5.00% ownership in O & G ; that the subject shares was acquired by Mr. Occhipinti on December 21, 2006. It is finally represented, per Sworn Statement dated July 9, 2012 issued by O & G , that the issue or transaction subject of this request for 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. 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: aDSIHc "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%)." 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. . . ." Thus, Article 10 of the Philippines-Italy tax treaty, which you invoke, may apply to the instant case. It provides: "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 fifteen per cent of the gross amount of the dividend. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. xxx xxx xxx 4. 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. 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, a trade of 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 dividends are taxable in that other Contracting State according to its own law. . . ." ETHIDa Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Italy may be taxed in the Philippines at a rate not to exceed 15 percent of the gross amount of the dividends. In view thereof and considering that Mr. Occhipinti , a resident of Italy with no fixed place of business in the Philippines, holds 5 percent ownership in O & G , such dividends paid by O & G to Mr. Occhipinti are subject to the preferential tax rate of 15 percent of the gross amount thereof, pursuant to Article 10 of the Philippines-Italy tax treaty. 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue