ITAD BIR Ruling No. 324-11

December 19, 2011 ITAD BIR RULING NO. 324-11 Article 10, Philippines-China Tax Treaty; BIR Ruling No. ITAD-163-11 Quisumbing Torres 12th Floor, Net One Center 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig City Attention: Maria Ana Camila C. Jacinto Authorized Representative Gentlemen : This refers to your tax treaty relief application (TTRA) filed on May 20, 2011 requesting confirmation that the dividend payment by the Metropolitan Bank and Trust Company ("Metrobank") to Best Investment Corporation ("BIC") is subject to the 15 percent preferential tax rate, pursuant to Article 10 (2) (b) of the Agreement between the Government of the Republic of the Philippines and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-China tax treaty"). It is represented that BIC, with address at Suite 936, No. 2 Building, No. 1 Complex, Nao Shi Kou Da Jie, Xicheng District, Beijing, People's Republic of China, is a corporation organized and existing under the laws of China, and is a resident of China per the Certificate of Chinese Fiscal Resident issued by the Director of Xicheng District Office, SAT, Beijing dated January 6, 2011; that it is not registered either as a corporation or partnership in the Philippines per certification issued by the Securities and Exchange Commission dated July 6, 2010; and that, on the other hand, Metrobank is a corporation organized and existing under the laws of the Philippines with principal address at Metrobank Plaza, Sen. Gil Puyat Avenue, Makati City. It is further represented, per the Secretary's Certificate issued by Metrobank on May 19, 2011, that at the regular meeting of its Board of Directors held on March 25, 2011, the following cash dividends were declared out of the audited unrestricted retained earnings of Metrobank as of February 28, 2011: Regular dividend of Php1.00 per outstanding share of its common stock, payable on May 23, 2011 to the holders of record on May 16, 2011; that per the same Secretary's Certificate issued by Metrobank, based on the certifications issued by the HSBC Securities Services as custodian of various non-resident foreign shareholder dated May 18, 2011, BIC is the beneficial holder of common shares of Metrobank as of May 16, 2011; that per the duly notarized Certification issued by HSBC Securities Services on May 18, 2011, as of May 16, 2011 and the date of payment of the subject dividend which is on May 23, 2011, BIC is the beneficial holder of 14,361,636.00 common shares of Metrobank valued at 971,564,675.40 and which constitutes 0.680199446% ownership in Metrobank. cDCaTH It is finally represented, per the Sworn Statement issued by Metrobank dated June 3, 2011, that the 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 proceeding, or judicial appeal. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies, in general, to income 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." Thus, Article 10 of the Philippines-China 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 a Contracting State to a resident of the other Contracting State may be taxed in that other State. AISHcD 2. However, such dividends may also be taxed in the Contracting 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 beneficial owner is a company 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. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term 'dividends' as used in this Article means income from shares, or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of China at a rate not exceeding 10 percent if the latter company holds directly at least 10 percent of the capital of the paying company paying the dividends; otherwise, said dividends may be taxed at a rate not exceeding 15 percent of the gross amount thereof, in all other cases. In view of the foregoing, inasmuch as BIC holds only 0.680199446% of the issued and outstanding capital stock of Metrobank, which is less than the required minimum shareholdings of 10 percent, the said dividends paid by Metrobank to BIC are subject to the 15 percent preferential tax rate prescribed under Article 10 (2) (b) of Philippines-China tax treaty. (BIR Ruling No. ITAD-163-11 dated May 27, 2011) This ruling is issued on the basis of the foregoing 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