ITAD BIR Ruling No. 332-13

December 2, 2013 ITAD BIR RULING NO. 332-13 Article 10, Philippines-Singapore tax treaty Gardenia Bakeries (Philippines), Inc. Gardenia Centre, Star Avenue Laguna International Industrial Park (LIIP) Mamplasan, Bian 4038, Laguna Attention: Simplicio P. Umali Jr. General Manager Gentlemen : This refers to your tax treaty relief application filed on April 30, 2012, requesting confirmation that dividends received by Gardenia International (S) Pte., Ltd. ("Gardenia International") from Gardenia Bakeries (Philippines), Inc. ("Gardenia Philippines") are subject to income tax of 15 percent preferential rate pursuant to the Convention between the Republic of the Philippines and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Singapore tax treaty") . Facts It is represented that Gardenia International is a foreign corporation organized and existing under the laws of Singapore and a resident thereof based on its Articles of Association and on the Certificate of Residence issued by the Inland Revenue Authority of Singapore; that Gardenia International is situated at 150 South Bridge Road, #09-04, Singapore; that Gardenia International is not registered as corporation in the Philippines per certification issued by the Securities and Exchange Commission dated April 1, 2011; and that, on the other hand, Gardenia Philippines is a corporation organized and existing under the laws of the Philippines with principal address at Gardenia Centre, Star Avenue, Laguna International Industrial Park (LIIP), Mamplasan, Bian, Laguna, Philippines. AIaSTE It is further represented that, based on the Certificate issued by the Corporate Secretary of Gardenia Philippines , on March 26, 2012, the Board of Directors of Gardenia Philippines , at a special meeting, approved the declaration of dividends in favor of its stockholders amounting to Php10,800,000.00 of records as of December 31, 2011 and payable on May 31, 2012; that since November 17, 2004 and immediately preceding the date of dividend payment on May 31, 2012, Gardenia Philippines confirms that Gardenia International shows the following stockholdings: Type of Shares Number of Shares Par Value Mode of Acquisition Date of Acquisition Percentage of Ownership Common 130,000 P1,000.00 Original Issuance November 17, 2004 27% Preferred 360,000 P1,000.00 Conversion Loan to Equity 73% Total 490,000 100% and that said dividend were paid on May 30, 2012 based on the Certification issued by RCBC together multiple fund transfer made thru the Rizal Commercial Banking Corporation dated May 30, 2012. It is finally represented that the dividends subject of the above application are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal, based on the Affidavit issued by the Financial Controller of Gardenia Philippines dated April 24, 2012. Ruling In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended, provides that dividends paid to Gardenia International , being a foreign corporation not engaged in trade or business in the Philippines, are subject to income tax at the rate of 30 percent, thus: TcSAaH "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 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): 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 Code provides that such 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: "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. SCaDAE xxx xxx xxx" In this particular case, the treaty involved is the Philippines-Singapore tax treaty , which, in its Article 10, 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. 2. However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company'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 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. aATHIE xxx xxx xxx 4. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or jouissance rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. 5. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, carries on in the other Contracting State of which the company paying the dividends is a resident, trade or business through a permanent establishment situated therein, or performs in that other State professional services from a fixed base situated therein, and the holding by virtue of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the above provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Singapore at a rate not exceeding 15 percent of the gross amount dividends if the latter holds directly at least 15 percent of the outstanding voting shares of the first-mentioned company, and such shareholdings should have existed during the part of the taxable year immediately preceding the day of payment of the dividends and during the whole of its prior taxable year. In all other cases, the 25 percent preferential tax rate shall apply. In view of the foregoing, since Gardenia International owns 99.99% outstanding shares of Gardenia Philippines considering that it is also the beneficial owner of 5% shares per Secretary Certificate, during the part of Gardenia Philippines (since November 17, 2004) taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, this Office is of the opinion and so holds that the cash dividends paid by Gardenia Philippines to Gardenia International are subject to the preferential rate of 15 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. cSTHaE 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