ITAD BIR Ruling No. 325-11

December 19, 2011 ITAD BIR RULING NO. 325-11 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD 007-10 Philippine Long Distance Telephone Company (PLDT) Ramon Cojuangco Building Makati Avenue 1226 Makati City Attention: Charito R. Villena Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 14, 2011 requesting confirmation that the dividends paid by Philippine Long Distance Telephone Company ("PLDT") to the following corporations and funds, namely: Japan Trustee Services Bank, Ltd. STB Daiwa Tounan-Asia Emerging Kabu Mother Fund ("JTSB-Daiwa"); Japan Trustee Services Bank, Ltd. Re: STB Emerging Markets High Dividend Equity Mother Fund ("JTSB-Emerging Markets"); The Masters Trust Bank of Japan Ltd. RE: Asian Stock Fund Private Placement ("MTB-Asean Stock Fund"); The Masters Trust Bank of Japan Ltd. RE: Muam Emerging Equity Index Mother Fund ("MTB-Muam Emerging"); and The Masters Trust Bank of Japan Ltd. RE: PCA Asia Oceania High Dividend Equity Mother Fund ("MTB-PCA Asia") are subject to a preferential tax rate of 15 percent pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty"), as amended by a Protocol effective January 1, 2009. AaECSH It is represented that JTSB (in trust for Daiwa and Emerging Markets) is a foreign corporation organized and existing under the laws of Japan and is a tax resident of Japan, with principal office at 8-11, Harumi 1-chome, Chuo-ku, Tokyo, Japan based on the Certificate of Residence issued by the District Director of Kyobashi Tax Office dated March 14, 2011; that MTB (in trust for Asean Stock Fund, Muam Emerging, and PCA Asia ) is a foreign corporation organized and existing under the laws of Japan and is a tax resident of Japan, with principal office at 2-11-3, Hamamatsu-cho, Minato-ku, Tokyo, Japan based on the Certificate of Tax Residence issued by the District Director of Shiba Tax Office dated March 25, 2011; that MTB-PCA Asia, JTSB-Daiwa, JTSB-Emerging Markets, MTB-Asean Stock Fund, MTB-Muam Emerging are not registered as corporations or partnerships in the Philippines based on the Certification of Non-Registration of Corporation dated June 16, 2011 and June 17, 2011 respectively, issued by the Securities and Exchange Commission for each of the foregoing non-resident corporations; and that, on the other hand, PLDT is a corporation duly organized and existing under the laws of the Philippines with office address at Ramon Cojuangco Building, Makati Avenue 1226, Makati City, Philippines. It is further represented that on March 1, 2011, the Board of Directors of PLDT declared cash dividends out of its unrestricted retained earnings as of December 31, 2010 in favor of holders of record on March 16, 2011, payable on April 19, 2011 in the following manner: Regular dividend of P78.00 per outstanding share of PLDT's common stock, and Special dividend of P66.00 per outstanding share of PLDT's common stock; and that per Certification issued by HSBC Securities Services ("HSBC"), custodian of the non-resident foreign shareholders (beneficial holder) dated March 30, 2011, the following beneficial holders hold PLDT shares of stock as follows: Trustee Corporation No. of Percentage Type of Shares of Share Ownership 1. JTSB-Daiwa 5,500 .002945% Common 2. JTSB-Emerging Markets 4,840 .002592% Common 3. MTB-Asean Stock Fund 2,650 .001419% Common 4. MTB-Muam Emerging 2,500 .001339% Common 5. MTB-PCA Asia 727,390 .389486% Common In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides as follows: "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, under Section 32 (B) (5) of the NIRC of 1997, as amended, such income derived by a nonresident foreign corporation in the Philippines may be exempt from income tax, or partially exempt if subject to reduced rate only, pursuant to a treaty obligation binding upon the Philippine government. It states: CcTHaD "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." Hence, Article 10 of the Philippines-Japan tax treaty, as amended, which you invoked, may apply. 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 Contracting State. 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 Contracting 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 either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; b) 15 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. Notwithstanding the provisions of paragraph 2, the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. 4. 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 assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. DSITEH xxx xxx xxx" Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10 percent if the company recipient of the dividends holds directly at least 10 percent of the voting shares or the total shares of the company paying the dividends, during the period of six months immediately preceding the date of payment of the dividends, or if the latter company is registered with the Board of Investments and engaged in preferred areas of investment under the investment incentive laws of the Philippines, and (b) 15 percent in all other cases. Accordingly, since JTSB-Daiwa, JTSB-Emerging Markets, MTB-Asean Stock Fund, MTB-Muam Emerging, and MTB-PCA Asia hold .002945 percent, .002592 percent, .001419 percent, .001339 percent, and .389486 percent ownership of the shares of PLDT respectively, the dividends paid by PLDT to the foregoing are subject to income tax at the rate of 15 percent of the gross amount thereof pursuant to Article (10) (2) (b) of the Philippine-Japan tax treaty, as amended. ( BIR Ruling ITAD 007-10 dated May 20, 2010; and BIR Ruling No. DA-ITAD 068-10 dated June 21, 2010. ) 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