ITAD BIR Ruling No. 327-11

December 19, 2011 ITAD BIR RULING NO. 327-11 Article 11, Philippines-USA tax treaty; BIR Ruling No. ITAD-39-10 Philippine Long Distance Telephone Company (PLDT) Ramon Cojuangco Building Makati Avenue 1226 Makati City Attention: Kathryn A. Zarate Authorized Representative Gentlemen : This refers to your Tax Treaty Relief Application (TTRA) filed on April 8, 2011 requesting confirmation that the dividends paid by Philippine Long Distance Telephone Company ("PLDT") to the following corporations, namely: California State Teachers Retirement System ("California Teachers"); GMO Emerging Countries Fund ("GMO"); Oppenheimer Global Allocation Fund ("Oppenheimer"); and Capital Income Builder, Inc. ("CIBI"). are subject to a preferential tax 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-United States tax treaty"). It is represented that California Teachers, GMO, Oppenheimer, and CIBI are foreign corporations organized and existing under the laws of the United States of America ("USA") and are tax residents thereof based on the Certification issued by the Internal Revenue Service, of the Department of the Treasury, Philadelphia, PA 19255, USA dated February 22, 2011, February 14, 2011, March 14, 2011, and August 16, 2010 respectively; that California Teachers, GMO, Oppenheimer, and CIBI are not registered as corporations or partnerships in the Philippines based on the Certification of Non-Registration of Corporation dated August 9, 2011, August 10, 2011, June 17, 2011 and June 17, 2011 n 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. cICHTD It is further represented that on March 1, 2011, the Board of Directors of PLDT declared cash dividends out of the audited 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 and J.P. Morgan ADR Department ("JP Morgan"), as Depositary Bank dated March 25, 2011, the following beneficial holders hold PLDT shares of stock as follows: Foreign Corporation No. of Percentage Type of Shares of Share Ownership 1. Oppenheimer 19,880 .0106455% Common 2. CIBI 1,053,250 .563970% Common J.P. Morgan Foreign Corporation No. of Percentage Shares of Ownership 1. California Teachers 40,286 .0216% 2. GMO 2,100 .0011% 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: DCISAE "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 11 of the Philippines-USA tax treaty, which you invoked, may apply to wit: "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. xxx xxx xxx 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-quoted provisions, the Philippines may tax the dividends paid by a Philippine company to a United States resident company at a rate not exceeding 20 percent if the such company owns at least 10 percent shares of the voting stock of the said Philippine company and 25 percent if its percentage of ownership of stock is less than 10 percent. Accordingly, since California Teachers, GMO, Oppenheimer, and CIBI hold .0106455 percent, .563970 percent, .0216 percent and .0011 percent ownership of the shares of PLDT respectively, which is less than 10 percent of the voting stock of PLDT, the dividends paid by PLDT to the foregoing are subject to income tax at the rate of 25 percent of the gross amount thereof. (BIR Ruling No. ITAD-39-10 dated September 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. DaAETS Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue n Note from the Publisher: Copied verbatim from the official copy.