ITAD BIR Ruling No. 297-15

November 24, 2015 ITAD BIR RULING NO. 297-15 Article 10 (Dividends), Philippines-France tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Veronica A. Santos Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 20 December 2012 requesting confirmation that the dividends paid by Aboitiz Power Corporation ("Aboitiz-Philippines") to BNP Paribas Arbitrage SNC ("BNP Paribas-France") are subject to the preferential tax treaty rate of 15 percent 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 Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-France tax treaty") . It is represented that BNP Paribas-France is a non-resident foreign corporation organized and existing under the laws of France based on the consularized and notarized Proof of Residency issued by the French Register of Trade and Companies. BNP Paribas-France is engaged in the business of providing investment services based on the consularized and notarized Articles of Incorporation issued by the French Register of Trade and Companies. The company BNP Paribas-France is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, Aboitiz-Philippines , is a corporation organized and existing under Philippine laws. It is represented that Aboitiz-Philippines has a subscribed capital divided into 7,358,604,307 shares. As of 31 December 2012, BNP Paribas-France is the registered and beneficial owner of 8,672,900 common shares in Aboitiz-Philippines representing approximately 0.117861% of the outstanding capital of Aboitiz-Philippines and that on 28 November 2012, the Board of Directors of Aboitiz-Philippines approved the declaration of cash dividends of Twenty Two Centavos (Php0.22) per share in favour of common shares as of record date 13 December 2012 based on the notarized Secretary's Certificate issued by the Corporate Secretary of Aboitiz-Philippines . It is further represented that on 20 July 2012, Aboitiz-Philippines remitted the amount of Three Million Four Hundred Sixty Four Thousand Four Hundred Twenty Pesos and Forty Centavos (P3,464,420.40) to BNP Paribas-France based on the notarized Certification issued by the Hongkong and Shanghai Banking Corporation Limited. 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, judicial or administrative protest, collection proceedings or judicial appeal based on the notarized Certification issued by the Corporate Secretary of Aboitiz-Philippines . In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to BNP Paribas-France are subject to income tax at the rate of 30 percent, thus: "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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "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." For this purpose, you invoke the Philippines-France tax treaty, as amended. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: "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; 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of France may be taxed in the Philippines at a rate (a) not to exceed 10% if the company recipient of the dividends holds directly at least 10% of the voting shares of the paying company; and (b) 15% in all other cases. Considering that BNP Paribas-France owns less than 10% of the common shares in Aboitiz-Philippines , the dividends paid by Aboitiz-Philippines to BNP Paribas-France are subject to the preferential tax rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) (b) of the Philippines-France tax treaty, as amended. 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 n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.