ITAD BIR Ruling No. 318-13

December 2, 2013 ITAD BIR RULING NO. 318-13 Article 11, Philippines-USA tax treaty NavarroAmper&Co. 19th Floor Net Lima Plaza 5th Avenue corner 26th Street Bonifacio Global City, Taguig Attention: Atty. Walter L. Abela, Jr. Gentlemen : This refers to your application for tax treaty relief filed on April 17, 2013, requesting confirmation that the dividends paid by Philippine Long Distance Telephone Company ("PLDT") to Invesco Developing Market Funds ("Invesco") shall be subject to the preferential rate of 25 percent 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-USA tax treaty") . It is represented that Invesco is a resident of the United States of America (USA) based on the Certificate of Residence issued by the tax authority of USA on January 22, 2013; that Invesco is not registered as a corporation or a partnership in the Philippines based on the Certificate issued by the Philippine Securities and Exchange Commission on April 22, 2013; and that on the other hand, PLDT is a domestic corporation with principal address at the Ramon Cojuangco Building, Makati Avenue. It is further represented that the Board of Directors of PLDT, during its meeting on March 5, 2013, declared the following cash dividends: a) Final regular dividend of PhP60.00 per outstanding share of PLDT's common stock, payable on April 18, 2013 to the holders of record on March 19, 2013; cDEHIC b) Special dividend of PhP52.00 per outstanding share of PLDT's common stock, payable on April 18, 2013 to the holders of record on March 19, 2013; that Invesco holds 1,146,485 shares in PLDT with a par value of PhP3,406,136,219 or 0.53 percent, from May 20, 2003 to August 9, 2011 based on the Certificate issued by the Corporate Secretary of PLDT on April 23, 2013; and that the dividend payments were remitted by PLDT to Invesco on April 18, 2013 based on the Certificate issued by Deutsche Bank AG Manila on May 30, 2013. It is finally represented that the dividends subject of the application for tax treaty relief 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 PLDT on April 12, 2013. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended, provides that dividends derived by non-resident foreign corporation not engaged in trade or business in the Philippines, 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 us . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). aDHScI xxx xxx xxx" However, Section 32 (B) (5) of the same Code provides that such dividends may be exempt 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. xxx xxx xxx" With respect to a treaty, Article 11 of the Philippines-USA tax treaty provides as follows, viz. : "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 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. aIcTCS 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. xxx xxx xxx." Based on the above-cited provisions, a preferential tax rate of 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. This being the case, since Invesco holds 1,146,485 shares in PLDT consisting of 0.53 percent ownership, or less than 10 percent, this Office is of the opinion and so holds that such dividend payment by PLDT to the Invesco is subject to the preferential tax rate of 25 percent, based on the gross amount of dividends, pursuant to Article 11 (2) (a) of the Philippines-USA 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. DHSCTI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue