ITAD BIR Ruling No. 319-14

December 15, 2014 ITAD BIR RULING NO. 319-14 Articles 9 (Dividends); Philippines-United Kingdom tax treaty Foseco Philippines, Inc. Warehouse #8 c/o Sunmade Agriplus, Inc. Compound, Malitlit Road, Brgy. Dita, Sta. Cruz, Laguna Attention: Bricel Ann L. Reyes Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on 17 January 2014 requesting confirmation that the dividends paid by FOSECO Philippines, Inc. ("FOSECO-Philippines") to FOSECO Holding Limited ("FOSECO-UK") 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 United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains ("Philippines-UK tax treaty") . It is represented that FOSECO-UK is a non-resident foreign corporation organized and existing under the laws of the United Kingdom with principal address at 165 Fleet Street, London EC4A 2AE based on the consularized and notarized Certificate of Residency issued by the HM Revenue & Customs of the United Kingdom and consularized and notarized Memorandum of Association. The company FOSECO-UK 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 16 December 2013. On the other hand, FOSECO-Philippines , is a domestic corporation with principal address at Warehouse #8 c/o Sunmade Agriplus, Inc. Compound, Malitlit Road, Brgy. Dita, Sta. Cruz, Laguna. It is further represented that FOSECO-Philippines has an authorized capital stock of Fifty Two Million Pesos (P52,000,000.00) consisting of Five Hundred Twenty Thousand (520,000) common shares with a par value of One Hundred Pesos per share and that the details of FOSECO-UK's common shares in FOSECO-Philippines is as follows: CEIHcT Number of Percentage of Par Value (P100 Amount Mode and Date of Common Shares Ownership per share) Subscribed and Acquisition Subscribed Paid-up 266,555 99.99% P26,655,500.00 26,655,500.00 By purchase on 16 September 2001 based on a notarized Secretary's Certificate from the Assistant Corporate Secretary of FOSECO-Philippines . It is further represented that on 28 January 2014, FOSECO-Philippines remitted the amount of Two Hundred Seventy Nine Thousand Six Hundred Five US Dollars and Twenty Six Cents (US$279,605.26) to FOSECO-UK based on the notarized Certification issued by the Standard Chartered Bank. 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 Sworn Statement issued by the Finance Manager of FOSECO-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 FOSECO-UK are subject to income tax at the rate of 30 percent, thus: "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-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%)." ECTIHa 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: "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: 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-United Kingdom tax treaty. Paragraph 1, sub-paragraphs (a) and (b) of Article 9 on Dividends thereof provide: "Article 9 Dividends 1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends. HASDcC 2. Dividends derived from a company which is a resident of the United Kingdom by a resident of the Philippines may be taxed in the Philippines. Such dividends may also be taxed in the United Kingdom and according to the laws of the United Kingdom, but where such dividends are beneficially owned by a resident of the Philippines the tax so charged shall not exceed: a) 15% of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; b) in all other cases 25% of the gross amount of the dividends." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of the United Kingdom may be taxed in the Philippines at a rate (a) not to exceed 15% if the company recipient of the dividends holds directly at least 10% of the voting shares of the paying company; and (b) 25% in all other cases. Considering that FOSECO-UK owns 99.99% of the shares in FOSECO-Philippines , the dividends paid by FOSECO-Philippines to FOSECO-UK are subject to the preferential tax rate of 15 percent of the gross amount thereof pursuant to Article 9, paragraph 1, sub-paragraph (a) of the Philippines-UK 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 Bureau of Internal Revenue Footnotes n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.