ITAD BIR Ruling No. 293-14

October 10, 2014 ITAD BIR RULING NO. 293-14 Article 10, Philippines-Italy tax treaty O&G Leather Manufacturing Corporation No. 4A1-2 Phil Excel Business Park Clark Freeport Zone, Pampanga Attention: Stefano Occhipinti President Gentlemen : This refers to your tax treaty relief application filed on November 23, 2011, requesting confirmation that dividends paid by O&G LEATHER MANUFACTURING CORPORATION ("O&G") to MR. STEFANO SGRULLETTI ("Mr. Sgrulletti") are subject to 15 percent preferential tax rate pursuant to Article 10 of the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and the Prevention of Fiscal Evasion ("Philippines-Italy tax treaty"). It is represented that Mr. Sgrulletti is a resident of Italy based on the Certificate of Residence issued by the Agenzia Entrate of Italy on June 23, 2011; that Mr. Sgrulletti is residing at No. 34 Via Emanuele Paterno di Sessa, Roma, Italia; that Mr. Sgrulletti has no existing business name registered under his name with the Department of Trade and Industry based on the Certification issued by the same office on November 18, 2011; and that O&G, on the other hand, is a domestic corporation situated at No. 4A1-2 PhilExcel Business Park, Clark Freeport Zone, Pampanga, Philippines. It is further represented that on November 15, 2011, the Board of Directors of O&G approved a declaration of cash dividend in the amount of P8,000,000.00 in favor of all stockholders on record of O&G as of November 15, 2010; that Mr. Sgrulletti holds 20,000 shares constituting 3.50 percent of the outstanding capital stock of O&G; and that based on a Certification issued by the Company Treasurer on March 7, 2014 such dividends was remitted to Mr. Sgrulletti on April 2, 2012. CacEID It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Sworn Statement issued by the Corporate Secretary of O&G on November 9, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, provides that dividends payable to Mr. Sgrulletti, a non resident alien individual not engaged in trade or business in the Philippines, are subject to income tax at the rate of 25 percent, thus: "Section 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Tax on Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. . . ." 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." In relation thereto, Article 10 of the Philippines-Italy tax treaty, which you invoked, may apply to the instant case. It provides: SDTaHc "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 15 percent of the gross amount of the dividend. 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 State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Italy may be taxed in the Philippines at a rate not to exceed 15 percent of the gross amount of dividends. EITcaD Accordingly, the dividends paid to Mr. Sgrulletti by O&G are subject to the preferential tax rate of 15 percent of the gross amount of the dividends pursuant to Article 10 (2) of the Philippines-Italy 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue