ITAD BIR Ruling No. 267-15

September 9, 2015 ITAD BIR RULING NO. 267-15 Article 10, Philippines-Switzerland tax treaty Philip Morris Philippines Manufacturing, Inc. 27th Floor Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Hannah Hee Kyung Yun Director Finance and Administration Gentlemen : This refers to your tax treaty relief application filed on May 13, 2014, requesting confirmation. that the cash dividends paid by Philip Morris Philippines Manufacturing, Inc. ("Philip Morris-Phil") to Philip Morris Brands Sarl ("Philip Sarl") are subject to final withholding tax at the rate of 10 percent, pursuant to Article 10 of the Convention between the Republic of the Philippines and the Swiss Federation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that Philip Sarl is a corporation organized and existing under the laws of Switzerland, and is a resident thereof per the Statement on the Tax Status of the Business issued on August 16, 2013 by RPUBLIQUE ET CANTON DE NEUCHTEL, DPARTEMENT DES FINANCES, ET DE LA SANT, OFFICE DE TAXATION DES PERSONNES MORALES, ET DE RVISION; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated March 5, 2014; and that, on the other hand, Philip Morris-Phil is a corporation organized and existing under the laws of the Philippines. It is further represented that at the Meeting of the Board of Directors of Philip Morris-Phil held on May 12, 2014, the Board of Directors of Philip Morris-Phil declared cash dividends in favor of its preferred stockholders of Three Billion Three Hundred Million Pesos (PHP3,300,000,000.00) from out of Philip Morris-Phil 's retained earnings as of April 30, 2014; that as of December 31, 2013, Philip Sarl owns a total of 279,995 common shares and 250,000 preferred shares with a total par value of PhP529,995,000.00 which represents 99.999% ownership of the paid-up capital in Philip Morris-Phil . CAacTH It is finally represented, per the Sworn Statement dated May 13, 2014 issued by Philip Morris-Phil , 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: "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. xxx xxx xxx" Thus, Article 10 of the Philippines-Switzerland tax treaty, which you invoke, may apply to the instant case. It provides: "Article 10 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 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 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. xxx xxx xxx 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. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, shall apply. xxx xxx xxx" Based on the aforequoted provisions of Article 10, 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 if the shareholdings of the recipient company is below 10 percent of the capital of the paying company. In view thereof, considering that Philip Sarl is a resident corporation in Switzerland with no fixed place of business in the Philippines, and directly owns 99.999% ownership paid-up capital in Philip Morris-Phil , this Office is of the opinion and so holds that the dividends paid by Philip Morris-Phil to Philip Sarl are subject to 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Switzerland 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. IAETDc Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue