ITAD BIR Ruling No. 273-14

October 10, 2014 ITAD BIR RULING NO. 273-14 Article 10, Philippines-Singapore tax treaty Schenker Philippines, Inc. KM 19 West Service Sabrina Compound Marcelo Green Village Paraaque City Attention: Romeo S. Ramos Gentlemen : This refers to your Tax Treaty Relief Application filed on September 26, 2012, on behalf of SHENKER ASIA PACIFIC PTE. LTD. (" SCHENKER Singapore "), requesting confirmation that the dividends to be paid to SCHENKER Singapore by SCHENKER PHILIPPINES, INC. (" SCHENKER Philippines ") are subject to the preferential tax rate of 10 percent pursuant to Article 10 (2) (a) of 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"). Facts It is represented that SCHENKER Singapore is a nonresident foreign corporation organized and existing under the laws of Singapore with registered office address No. 2 Changi South Avenue 1, Singapore per Certificate of Residence issued by the Inland Revenue Authority of Singapore dated October 2, 2012; that SCHENKER Singapore is not registered as a corporation or as a partnership in the Philippines as evidenced by the Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated October 3, 2012; and that, on the other hand, SCHENKER Philippines is a domestic corporation organized and existing under the laws of the Philippines with principal address KM 19 West Service Sabrina Compound, Marcelo Green Village, Paraaque City, Philippines. It is also represented that, on September 21, 2012 the Board of Directors of SCHENKER Philippines, declares cash dividends in the total amount of One Hundred Forty Million Pesos (P140,000,000.00), in favor of all stockholders of record October 21, 2012, payable on November 21, 2012; that as of October 21, 2012 SCHENKER Singapore stockholdings from SCHENKER Philippines are as follows: SIcTAC Subscribed Mode of Acquisition Acquisition Date Percentage of Number of Ownership Shares 119995 Bought from Bax Global 39041 99.99% International, Inc. It is finally represented that per Sworn Statement of SCHENKER Philippines dated September 12, 2012, the transaction subject of the application for tax treaty relief is not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. Ruling 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" 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: HIESTA 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" In this particular case, the treaty involved is the Philippines-Singapore tax treaty, which, in its Article 10, 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: 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. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 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. DIHETS xxx xxx xxx" Based on the above provision, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Singapore at a rate not exceeding 15 percent of the gross amount dividends if the latter holds during the part of the Philippine company's taxable year which precedes the date of payment of the dividend and during the whole of the Philippine company's taxable year, if any, at least 15 percent of the outstanding shares of voting stock of the Philippine company. In all other cases, the 25 percent preferential tax rate shall apply. In view of the foregoing, since SCHENKER Singapore owns 99.99% of the outstanding and voting shares of SCHENKER Philippines (since November 20, 2006), the paying corporation, during the part of SCHENKER Philippines 's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, this Office is of the opinion and so holds that the cash dividends to be paid by SCHENKER Philippines to SCHENKER Singapore are subject to the preferential rate of 15 percent withholding tax pursuant to Article 10 (2) (a) 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue