ITAD BIR Ruling No. 258-12

June 14, 2012 ITAD BIR RULING NO. 258-12 Article 10 (Dividends) Philippines-Netherlands tax treaty; BIR Ruling No. ITAD 89-11 Masinloc Power Partners Co. Ltd. Masinloc Coal-Fired Thermal Power Plant Barangay Bani Masinloc Zambales Attention: Moazzam Nazir Chanda CFO Gentlemen : This refers to your application for tax treaty relief dated September 21, 2011, requesting confirmation that dividends paid by Masinloc Power Partners Co. Ltd. ("Masinloc-Phil") to AES Great Britain Holdings B.V. ("AES") are subject to preferential tax rate of 15 percent 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 AES is a corporation organized and existing under the laws of the Netherlands; that it is a resident of the Netherlands, with principal business address at Parklaan 32 3016 BC Rotterdam, based on the Declaration of Residence issued by the Inspector of the Tax Administration Rivierenland, the Netherlands on July 11, 2011; that AES has an authorized capital stock of ninety thousand euros (EUR90,000) divided into ninety thousand (90,000) ordinary shares, each having a nominal value of one euro (EUR1) based on its Deed of Incorporation dated May 11, 2007; that 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 August 22, 2011; and that, on the other hand, Masinloc-Phil is a partnership organized and existing under the laws of the Philippines, situated at Masinloc Coal-Fired Thermal Power Plant Barangay Bani, Masinloc, Zambales. It is further represented, that pursuant to the Amended Articles of Limited Partnership, Masinloc-Phil is authorized to distribute the profit to its (a) General Partner, Masinloc AES Power Company Limited, which owns 99.5% of the partnership; and (b) Limited Partner, (AES) which owns 0.05% of the partnership, in proportion to their capital contributions; that based on the Partner's Certificates issued by the General Partner of Masinloc-Phil on September 15, 2011, that Masinloc-Phil has a profit of One Billion Two Hundred Twenty Million Four Hundred One Thousand Seven Hundred Sixty Nine Pesos and 83/100 (PhP1,220,401,769.83) as of August 31, 2011 from its business operations which is ready for distribution as dividends to its partners; and that on September 23, 2011, the share of AES in the profit was paid by the Partnership based on the Certification dated December 20, 2011 issued by the authorized representative of the General Partner in Masinloc-Phil having custody of all the financial documents of the Partnership. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, the dividends paid to AES 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%). ECDaAc xxx xxx xxx" However, under Section 32 (B) (5) of the Tax Code, such dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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, 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: 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. (emphasis supplied)" Based on the above-cited paragraph 2, 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 if the recipient of the dividends is a company whose capital 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 in all other cases. This being the case, since AES holds less than 10 percent of the capital of Masinloc-Phil, (in fact, it holds only 0.05% of the outstanding capital stock of AES), such dividends paid by Masinloc-Phil to AES are subject to income tax at the rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) (b) of the Philippines-Netherlands tax treaty. (BIR Ruling No. 89-11 dated March 14, 2011) . 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. ScTIAH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue