ITAD BIR Ruling No. 319-11

December 15, 2011 ITAD BIR RULING NO. 319-11 Article 10, Philippines-Netherlands Tax Treaty; BIR Ruling No. ITAD-99-08; BIR Ruling No. ITAD-46-10; BIR Ruling No. ITAD-37-10; BIR Ruling No. ITAD-29-10; BIR Ruling No. ITAD-21-10 Manabat San Agustin & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City Attention: Ma. Carmela M. Peralta Principal, Tax Mr. Steve Dixon National Finance Director Unilever Philippines, Inc. Gentlemen : This refers to your tax treaty relief application filed on June 16, 2011, on behalf of New Asia B.V. ("New Asia") , requesting confirmation that dividend payments of Unilever Philippines, Inc. ("Unilever") to New Asia are subject to 10 percent preferential tax rate pursuant to the Convention between the Kingdom of the Netherlands and the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). It is represented that New Asia, with address at Weena 455, 3013 Al Rotterdam, Netherlands, is a resident of the Netherlands within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued by the Inspector of the Tax and Customs Administration of the Netherlands on August 16, 2010; that New Asia is a private company duly organized and existing under the laws of the Netherlands, with authorized capital of one hundred thousand Euro (EUR 100,000), divided into one hundred thousand (100,000) shares of one euro (EUR1.00) each, based on its Articles of Association; that New Asia is not registered as a corporation or as a partnership in the Philippines, as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on August 24, 2010; and that, on the other hand, Unilever is a domestic corporation located at the 1351 United Nations Avenue, Philippines. ESTDIA It is further represented that at the special meeting held on June 6, 2011, the Board of Directors of Unilever resolved to distribute cash dividends for 2010, out of its unrestricted earnings in the amount of Three Hundred Twenty-Six Million Nine Hundred Fifteen Thousand Eight Hundred Seven Pesos and 18/100 (Php326,915,807.18) to its stockholders of record as of December 31, 2010 in proportion to their respective shareholdings to be distributed not later than June 30, 2011; that as of the dates of declaration and payment of dividends, New Asia is a registered shareholder of 4,918,513 subscribed shares at par value per share of Php50.00 or a total of Php245,925,650.00; and that these shares were transferred from Mavibel B.V. to New Asia on June 26, 2003. It is finally represented, based on the Sworn Statement by the National Finance Director of Unilever on June 8, 2011, that the transaction subject of the 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 of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, 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 . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended, provides that any income may be exempt from income tax to the extent required by any treaty obligation binding upon the Philippine Government, thus: EDIaSH "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" Thus, Article 10 of the Philippines-Netherlands tax treaty, which you invoke, may apply to the instant case. It provides: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws 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 the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as 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, dividends arising in the Philippines and paid to a resident of the Netherlands may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed: (a) 10 percent of the gross amount of dividends if the recipient of the dividends is a company, the capital of which is wholly or partly divided into shares, and which holds directly at least 10 percent of the capital of the company paying the dividends; and (b) 15 percent of the gross amount of the dividends in all other cases. ATHCac Accordingly, inasmuch as New Asia is a private company in the Netherlands, the capital of which is wholly divided into shares and since New Asia holds directly 100 percent of the capital of Unilever (which is actually more than the required minimum of shareholding of 10 percent), the dividends to be paid by Unilever to New Asia are subject to income tax in the Philippines at the rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. [BIR Ruling No. ITAD-46-10 dated October 5, 2010; BIR Ruling No. ITAD-37-10 dated September 16, 2010; BIR Ruling No. ITAD-29-10 dated August 27, 2010; BIR Ruling No. ITAD-21-10 dated August 20, 2010; BIR Ruling No. ITAD-99-08 dated November 17, 2008] 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