ITAD BIR Ruling No. 258-11

November 10, 2011 ITAD BIR RULING NO. 258-11 Article 10 (2) (a) Philippines-Switzerland tax treaty; BIR Ruling No. ITAD 053-10; BIR Ruling No. ITAD 042-10; BIR Ruling No. ITAD 009-10 Lexmark International (Philippines), Inc. Mactan Economic Zone II, Lapu-lapu City Attention: Marilyn M. Tan Director/Corporate Secretary Gentlemen : This refers to your tax treaty relief application ("TTRA") filed on August 10, 2011 requesting confirmation that the withholding tax rate on the dividends paid to Lexmark International Technology S.A. ("Lexmark International") by Lexmark International Philippines, Inc. ("Lexmark Philippines") is 10 percent pursuant to the Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . 1 It is represented that Lexmark International is a foreign corporation duly organized and existing under the laws of Switzerland with principal address at c/o ICC Bloc A, Route de Pr -Bois 20, 1215 Gen va 15 based on the Certificate issued by the Administration Fiscale, Cantonale, Geneva, Switzerland; that it is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company dated May 12, 2011 issued by the Securities and Exchange Commission; and that Lexmark Philippines, on the other hand, is a domestic corporation duly organized and existing under Philippine laws with business address at Mactan Economic Zone II, Lapu-lapu City, Philippines. It is further represented that on August 5, 2011, the Board of Directors of Lexmark Philippines approved a declaration of cash dividends in the amount of Three Hundred Twenty Million Pesos (Php320,000,000.00) to all stockholders on record as of December 31, 2010, payable not later than August 31, 2011; that as per certification issued by the Corporate Secretary of Lexmark Philippines, Lexmark International holds 3,664,139 shares which constitute 100 percent of the issued and outstanding shares of Lexmark Philippines since December 31, 2010; and 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 as per certification issued by the Director and Corporate Secretary of Lexmark Philippines dated August 8, 2011. ISAcHD In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, applies, in general, to dividends derived in the Philippines by a nonresident foreign corporation. It states: "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%)." DSHTaC However, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by foreign corporations 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 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: IaCHTS 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-Switzerland 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 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) 10 per cent of the gross amount of the dividends if the beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company; b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. cDICaS This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. 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 other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of that State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends paid by a Philippine corporation to a resident of Switzerland may be taxed at a rate not exceeding 10 percent of the gross amount of dividends if the recipient is a company which holds directly at least 10 percent of the capital of the Philippine corporation; and 15 percent. Such being the case and considering that Lexmark International holds 100 percent of the capital of Lexmark Philippines , this Office is of the opinion and so holds that the dividend payments by Lexmark Philippines to Lexmark International shall be subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty. (BIR Ruling No. ITAD-053-10 dated October 18, 2010; BIR Ruling No. ITAD-042-10 dated September 23, 2010; and BIR Ruling No. ITAD-009-10 dated June 3, 2010) THIcCA 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. ACDIcS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed June 24, 1998 and effective April 30, 2001.