ITAD BIR Ruling No. 277-13

September 20, 2013 ITAD BIR RULING NO. 277-13 Article 10 (2) (a), Philippines-France tax treaty Tam-Yap Caga & Ilao Law Offices Unit B, 15th Floor, ACT Tower 135 H.V. Dela Costa Street Salcedo Village, Makati City Attention: Atty. Teresa R. Tam-Yap Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on March 20, 2012 on behalf of Egis Road Operations S.A. ("Egis") ,requesting confirmation that the dividend payment by Tollways Management Corporation ("TMC") to Egis is subject to 10 percent preferential tax rate pursuant to the 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") . It is represented that Egis , with address at 11 Avenue de Centre 78 280 Guyancourt, France, is a resident of France within the meaning of Philippines-France tax treaty per Certificate of Tax Residence issued by the French Tax Authority on January 3, 2011; that it is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Corporation/Partnership issued by the Securities and Exchange Commission on March 5, 2012; and that, on the other hand, TMC is a corporation duly organized and existing under the laws of the Philippines, with principal office at Km. 12, North Luzon Expressway, Balintawak, Quezon City. SAHIaD It is further represented that during TMC's Board of Directors meeting held on February 23, 2012, a resolution was passed and approved declaring cash dividend in the aggregate amount of Two Hundred Nine Million Two Hundred Ninety-eight Thousand Nine Hundred Thirty-one Pesos (Php209,298,931.00),payable to TMC's stockholders of record as of February 23, 2012 based on their shareholdings as of said date; that the said dividend was remitted by TMC to Egis on April 23, 2012 through Banco de Oro Telegraphic transfer; that as of February 23, 2012, Egis is the legal and beneficial owner of 129,200 common shares amounting to PHP12,920,000, which represents 34% of the total number of shares of TMC; and that these shares were acquired by Egis on August 2, 2000 and August 30, 2006 by subscription. It is also represented that the issue/s or transaction subject of the above 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 taxpayer/s involved as evidenced by Certification issued by TMC on March 15, 2012. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997, as amended, provides as follows, viz. : "SEC. 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%)." cHDAIS However, Section 32 (B) (5) of the same Code provides as follows, to wit: "SEC. 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 ( i.e. ,TITLE II TAX ON INCOME): 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." In this particular case, you invoke Article 10 of the Philippines-France tax treaty. It provides as follows: "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: aSATHE a. 15 per cent of the gross amount of the dividends if the beneficial owner is a company (excluding partnership) which holds directly at least 10 per cent of the voting shares of the company paying the dividends; b. in all other cases 25 per cent of the gross amount of the dividends. xxx xxx xxx" The 15 percent preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividends owns at least 10 percent of the voting shares of the paying company. However, a Protocol amending the foregoing provisions took effect on January 1, 2000 which reads as follows: "In Article 10 of the Convention: EacHSA in paragraph 2, the rates of "15 percent" and "25 percent" are replaced respectively by "10 percent" and "15 percent" Based on the above provisions of the Protocol, the dividend paid to Egis by TMC shall be subject to a preferential tax rate of 10 percent of the gross amount of dividend considering that the transaction transpired after the effectivity of the Protocol and Egis is a company which beneficially owns 34 percent common shares in TMC as of record date. 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 having a different tax treatment, 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