ITAD BIR Ruling No. 307-11

December 2, 2011 ITAD BIR RULING NO. 307-11 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. ITAD-68-10 Deutsche Regis 23/F Tower One, Ayala Triangle 1226 Makati City Attention: Ma. Judith D. Tanedo Daniel I. Orajay Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on May 17, 2011, on behalf of Deutsche Asia Pacific Holdings Pte., Ltd. ("DAPH") requesting confirmation that dividend payments to be made by Deutsche Regis Partners, Inc. ("DRPI") to DAPH are subject to final withholding tax at the preferential rate of 15 percent pursuant to Article 10 (2) (a) of the Convention between the Republic of the Philippines and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty"). It is represented that DAPH is a corporation organized and existing under the laws of Singapore and is a resident of Singapore having its registered address at 1 Raffles Quay, #17-10 Singapore 048583 based on the Certificate of Residence issued by the Assistant Commissioner of the Corporate Tax Division for Comptroller of Income Tax of the Inland Revenue Authority of Singapore dated March 29, 2011; that it is not registered either as a corporation or partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated April 8, 2011; and that, on the other hand, DRPI is a corporation organized and existing under the laws of the Philippines with principal address at 23/F Tower One, Ayala Triangle, Ayala Avenue, Makati City 1226. It is further represented, based on the Secretary's Certificate issued by DRPI dated May 13, 2011, that DAPH legally and beneficially owns 489,998 common shares with a par value of Php100.00 per share or a total of Php489,998,000.00; that said total accumulated shares were acquired by DAPH in DRPI through various subscriptions made on various dates from 1989 until December 31, 2010, all shares being fully paid and non-assessable, and constitute 48.9998% of the issued and outstanding capital stock of DRPI; that at the meeting of the Board of Directors of DRPI held on April 15, 2011, a resolution was approved declaring cash dividends of PhP237,500,000.00 from the unrestricted retained earnings of DRPI as of December 31, 2010, which will be payable on May 30, 2011 to all stockholders of record as of December 31, 2010. DIEAHc It is finally represented that the issue or transaction subject of this 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 per the Sworn Statement issued by DRPI dated May 16, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, 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 interest, 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): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." 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 this particular case, you invoked Article 10 of the Philippines-Singapore tax treaty. It provides: DCaEAS "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) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company'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 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. 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 the State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, the 15 percent preferential tax rate on dividends applies whenever the recipient of the dividends owns at least 15 percent of the outstanding voting shares of the paying company, which 15 percent shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Since DAPH holds 48.9998% common ( i.e., voting) shares of the total outstanding shares of DRPI during the part of the taxable year which precedes the payment of the dividends and the whole of its prior taxable year, which is more than the required shareholdings of 15 percent, the dividends received by DAPH shall be subject to the preferential tax rate of 15 percent, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD-68-10 dated December 3, 2010) IHAcCS 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