ITAD BIR Ruling No. 315-13

December 2, 2013 ITAD BIR RULING NO. 315-13 Article 11, Philippines-US Tax Treaty SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Attention: Carolina A. Racelis Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on 12 April 2013 , requesting for confirmation that the dividend payment made by Microsoft Philippines, Inc. ("MPI") , to Microsoft Corporation ("Microsoft") is subject to preferential tax rate of twenty percent (20%), pursuant to Article 11 of 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 1 ("Philippines-USA tax treaty") . It is represented that Microsoft is a corporation organized and existing under the laws of United States of America and is a resident thereof with business address at 1 Microsoft Way, Redmond WA 98052-6399, as evidenced by the Certificate of Residence dated 23 January 2012, issued by the US Department of Treasury, and authenticated by the Vice Consul General of the Republic of the Philippines for Northern California, Alaska, Colorado, Idaho, Montana, Northern Nevada, Oregon, Utah, Washington and Wyoming, executed on 29 January 2013; that Microsoft 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 dated 19 April 2013; and that, on the other hand, MPI is a corporation organized and existing under the laws of the Philippines with business address at 16th and 17th Floors, 6750 Ayala Office Tower, 6750 Ayala Avenue, Makati City. cDCaTS It is further represented as certified by the Corporate Secretary of MPI executed on 05 April 2013, in a meeting of the Board of Directors of MPI held on 15 October 2012, the latter declared cash dividend amounting to One Hundred Sixty-Two Million One Hundred Fifty Three Thousand Six Hundred Fifty-Seven Philippine Pesos (PhP162,153,657.00), to be distributed among stock holders of record as of 30 June 2012; that since 22 April 1996, Microsoft owns 1,250 common shares of MPI, or equivalent to 99.99% ownership; and that as of 05 April 2013, said shares amount to Twelve Million Five Hundred Thousand Philippine Pesos (PhP12,500,000.00). It is further represented that the payment of the subject dividends were made by MPI through Citibank N.A. ("Citibank") on 05 June 2013, in the amount of Three Million Sixty Thousand Nine Hundred Forty-Six and 81/100 United States Dollars (USD3,060,946.81) as evidenced by a Certification issued by Citibank executed on 11 June 2013. It is finally represented that the dividends subject of this TTRA 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 Certification issued by the Senior Controller of MPI executed on 04 April 2013. Ruling In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, dividends paid to Microsoft are subject to income tax at the rate of 30 percent, thus: ATEHDc "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 percent (30%) 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." * However, under Section 32 (B) (5) of the Tax Code, such 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: "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: TIADCc 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." With respect to a treaty, you involve the Philippines-US tax treaty. Paragraphs 1 and 2 of Article 11 thereof provide: "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." EaIDAT Under paragraph 2 (b) of Article 11, dividends arising in the Philippines and paid to a resident of the US may be taxed in the Philippines at a rate not to exceed 20% of the gross amount of the dividends 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), 10% of the outstanding shares of the voting stock of the corporation paying the dividends is owned by a resident of the US. Accordingly, since Microsoft holds at least 10% of the outstanding shares of the voting stock of MPI (in fact 99.99%) during the taxable year preceding the date of payment of the dividends (2013), the dividends paid by MPI to Microsoft are subject to income tax at the rate of 20 percent of the gross amount thereof, pursuant to paragraph 2 (b), Article 11 of the Philippines-US tax treaty. 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 Footnotes 1. Its provisions on taxes apply on income derived or which accrued beginning January 1, 1983.