ITAD BIR Ruling No. 277-12

July 9, 2012 ITAD BIR RULING NO. 277-12 Article 10, Philippines-France tax treaty, as amended; BIR Ruling No. ITAD-036-11 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Ms. Malou P. Lim Ms. Veronica Jay R. Catajay Authorized Representative s Gentlemen : This refers to your tax treaty relief application filed on December 21, 2011, on behalf of Schneider Electric IT France ("SEIF"), requesting confirmation that dividend payments made by MEG UPS Systems Philippines, Inc. ("MUSPI") to SEIF are subject to the 10 percent preferential tax rate pursuant to the amended Convention between the Government of the Republic of the Philippines and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty, as amended"). It is represented that SEIF, with address at 140 Avenue Jean KUNTZMANN, ZIRST de Montbonnot, 38330 SAINT ISMIER, is a resident of France under the provisions of the Philippines-France tax treaty per the Certificate of Residence issued by the Ministere Du Budget Des Comptes Publics Et De La Fonction Publique on February 12, 2011; that SEIF is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on January 11, 2012; and that, on the other hand, MUSPI is a domestic corporation duly organized and existing under Philippine laws, located at the 24th Floor, Fort Legend Tower, Block 7, Lot 3 3rd Avenue corner 31st Street, fort Bonifacio, Taguig City. It is further represented, as shown in the Secretary's Certificate issued by MUSPI dated December 15, 2011, during the special meeting of the Board of Directors approved the declaration of a cash dividend equivalent to P50,000,000 to all stockholders of record as of November 30, 2011 proportionate to the shareholdings of the stockholder as of November 30, 2011, payable on December 22, 2011. ETDaIC Moreover, as shown in the Corporate Secretary's Certificate issued by MUSPI dated March 29, 2012, SEIF (formerly MGE UPS Systems France) owns Fifteen Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety-Nine (15,999,999) common shares in MUSPI with par value of One Peso (Php1.00) per share amounting to Fifteen Million Nine Hundred Ninety-Nine Thousand Nine Hundred Ninety-Nine Pesos (Php15,999,999.00) which constitute 99% ownership therein. Finally, it is represented that the transaction subject of the herein 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 a judicial appeal of the taxpayers involved per the Sworn Statement issued by MUSPI dated January 24, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (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, rents, royalties . . .: 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: aCASEH "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" In relation thereto, the Philippines-France tax treaty, as amended, may apply to the instant case. Its Article 10 provides that: "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) 10 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; acIHDA b) in all other cases, 15 per cent of the gross amount of the dividends. 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, 'jouissance' shares or 'jouissance' rights, mining shares, founders' 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 the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the foregoing, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of France at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 10 percent of the voting shares of the company paying the dividend and 15 percent in all other cases. Considering that based on the certification issued by the Corporate Secretary of MUSPI dated March 29, 2012, SEIF owns 99% shares in MUSPI, which is more than the 10 percent shareholding requirement of the total shares issued by that company, then the dividends paid by MUSPI to SEIF are subject to preferential tax rate of 10 percent of the gross amount of dividends, pursuant to Article 10 (2) (b) of the Philippines-France tax treaty, as amended. (BIR Ruling No. ITAD-036-11 dated February 1, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue