ITAD BIR Ruling No. 283-14

October 10, 2014 ITAD BIR RULING NO. 283-14 Article 10, Philippines-US tax treaty General Electric Philippines, Inc. 9th Floor, Net Cube Center 3rd Avenue corner 30th Street E-Square Crescent Park West Bonifacio Global City 1634 Taguig City Attention: Mr. Nelson V. Soriano Philippine Tax Leader Gentlemen : This refers to your tax treaty relief application filed on February 27, 2013, on behalf of GENERAL ELECTRIC COMPANY ("GEC"), requesting confirmation that the dividends paid to it by GENERAL ELECTRIC PHILIPPINES, INC. ("GEPI") are subject to 20 percent preferential tax rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income ("Philippines-US tax treaty"). It is represented that GEC, with office address at 12 Corporate Woods Boulevard, Albany, New York, United States of America (U.S.A), is a corporation organized and existing under the laws of the United States (US) and is a resident of the US for purposes of US taxation, based on the Certificate of Residency issued by the Internal Revenue Service dated February 1, 2013; that GEC 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 May 16, 2013; and that GEPI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with business address at 9th Floor, Net Cube Center, 3rd Avenue corner 30th Street, E-Square Crescent Park West, Bonifacio Global City 1634, Taguig City. It is further represented that on February 18, 2013, the Board of Directors of GEPI approved a resolution to declare cash dividends out of the unrestricted retained earnings of GEPI as of December 31, 2012 in the amount of Forty-One Million Six Hundred Three Thousand Six Hundred Fifty Pesos (Php41,603,650.02), n to be distributed among stockholders of record as of December 31, 2012 to be paid in one or more tranches on or before December 31, 2013; and that the subject dividends were paid by GEPI to GEC on November 7, 2013 through telegraphic transfer per Certification issued by Citi Bank on January 13, 2014. It is further represented that as of February 18, 2013, GEC is the legal and beneficial owner of 199,120 common shares of stock of GEPI, with par value of One Hundred Pesos (P100.00) per share or a total par value of Nineteen Million Nine Hundred Twelve Thousand Pesos (P19,912,000.00); and that GEC acquired the said shares in GEPI by acquisition, subscription, dividend stocks and increase of capital stocks on various dates from June 16, 1964 to October 22, 1976. HSDIaC It is finally represented, based on the Sworn Statement by of GEPI on February 27, 2013, that the transaction subject of the 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 judicial appeal of the taxpayer/s involved. 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: "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. aSACED xxx xxx xxx" With respect to a treaty, what you invoke for this purpose is Article 11 of the Philippines-US tax treaty. It provides: "Article 11 Dividends 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed (a) 25 percent of the gross amount of the dividend; or (b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying Corporation'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 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. 3. Dividends paid by a corporation of one of the Contracting States to a person other than a citizen or resident of the other Contracting State may be taxed by the other Contracting State, but only if a) Such dividends are treated as income from sources within that other Contracting State and, in the case of the Philippines, the additional tax described in paragraph 6 has not been paid with respect to the earnings distributed, or cHDAIS b) The recipient of the dividends has a permanent establishment or fixed base in the other Contracting State and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. 4. Paragraph 2 shall not apply if the recipient of dividends derived from 15 (Independent Personal Services), as the case may be, shall apply. 5. The term 'dividends' as used in this Convention means income from shares, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the corporation making the distribution is a resident. 6. Nothing in this Convention (except Article 9 (Shipping and Air Transport)) shall be construed as preventing the Philippines from imposing on the earnings of a corporation (other than a Philippine corporation) attributable to a permanent establishment in the Philippines, a tax in addition to the tax which would be chargeable on the earnings of a Philippine corporation, provided that any additional tax so imposed shall not exceed 20 percent of the amount of such earnings which have not been subjected to such additional tax in previous taxable years. For the purpose of this provision, the term "earnings" means business profits attributable to a permanent establishment in the Philippines in a year and previous years after deducting therefrom all taxes, other than the additional tax referred to herein, imposed on such profits by the Philippines. xxx xxx xxx" Based on the aforequoted provision, dividends arising in the Philippines and paid to a resident of the US may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 25 percent of the gross amount of dividends; and (b) 20 percent if the corporation holds directly at least 10 percent of the outstanding shares of the voting stock of capital of the company paying the dividends. In view thereof and considering that GEC, a resident of US with no fixed place of business in the Philippines, holds directly 100 percent shareholdings in GEPI or more than the required minimum shareholdings of 10 percent, this Office is of the opinion and so holds that said dividends paid by GEPI to GEC are subject to 20 percent preferential tax rate, pursuant to Article 11 (2) (b) of Philippines-US tax treaty. SDEITC 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue Footnotes n Note from the Publisher: Copied verbatim from the official copy. Discrepancy between amount in words and in figures.