ITAD BIR Ruling No. 339-11

December 23, 2011 ITAD BIR RULING NO. 339-11 Article 11 (2) (a), Philippines-Thailand Tax Treaty Salvador & Associates Attorneys-At-Law 815-816 Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue, 1226 Makati City Attention: Ms. Mary Rose V. Pascual Mr. Ray-an Francis V. Baybay Gentlemen : This refers to your tax treaty relief application filed on April 18, 2011, on behalf of Dusit Thani Properties Co., Ltd. ("TPCL") , requesting confirmation that dividend payments made by Philippine Hoteliers, Inc. ("PHI") to TPCL are subject to the 15 percent preferential tax rate pursuant to the amended Convention between the Government of the Republic of the Philippines and the Government of the Kingdom of Thailand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Thailand tax treaty") . It is represented that TPCL, with address at 946 Dusit Thani Building, 5th Floor, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, is a corporation organized and existing under the laws of Thailand for tax purposes and is a resident of Thailand per Certificate of Residence issued by the Director of Regional Revenue Office 3, Bangkok on May 30, 2011; that TPCL is not registered either as a corporation or as a partnership in the Philippines as shown in the Certification of Non-Registration of Company issued by the Securities and Exchange Commission on April 18, 2011; and that PHI, on the other hand, is a domestic corporation duly organized and existing under the laws of the Philippines with office address at Dusit Thani Hotel, Ayala Center, 1223 Makati City. It is also represented, per Secretary's Certificate dated April 7, 2011 that as of December 31, 2010, TPCL owns 3,211,332 common shares amounting to Php321,133,200.00, representing 88.01% ownership in PHI; and that these shares were acquired by TPCL on October 24, 2007. It is further represented that at the meeting of the Board of Directors of PHI on March 18, 2011, the Board approved the distribution of cash dividends to all its stockholders of record as of February 28, 2011 amounting to Php54,730,515.00, to be sourced from the unrestricted retained earnings of PHI, payable on or before May 30, 2011. HIDCTA Finally, it is represented that the transaction subject of the herein request for ruling not under investigation, on going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayers involved per the Sworn Statement issued by PHI dated April 8, 2011. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code of 1997 (Tax Code of 1997), as amended, applies, in general, to dividends 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 . . . dividends, rents, royalties . . .: 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 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. AaDSTH xxx xxx xxx" Thus, Article 10 of the Philippines-Thailand tax treaty which you invoked may apply to the instant case. It provides: "Article 11 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 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 of the dividends is a company which holds directly at least 15 per cent of voting shares of the company paying the dividends, the tax so charged shall not exceed. a) 15 per cent of the gross amount of the dividends if the company paying the dividends is a Philippine company or if the company paying the dividends is a Thai company engaged in an industrial undertaking; b) 20 per cent of the gross amount of the dividends if the company paying the dividends is a Thai company not engaged in an industrial undertaking. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 4. a) 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. TaCDAH xxx xxx xxx" Based on the foregoing provisions, dividends arising in the Philippines and paid by a Philippine company to a resident of Thailand may be subject to income tax in the Philippines at the rate of 15 percent if the recipient of the dividends is a company which holds directly at least 15 percent of the voting shares of the company paying the dividends. The rate of the tax that may be imposed thereon shall not exceed 20 percent of the gross amount of dividends of the company paying the dividends is a Thai company engaged in an industrial undertaking. This being the case, inasmuch as PHI is a Philippine company and since TPCL holds directly 88.01 percent of the outstanding capital stock of PHI (which in fact exceeds the minimum required percentage of holding of 15 percent) such dividends paid by PHI to TPCL are subject to income tax at the rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 11 of the Philippines-Thailand 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 of Internal Revenue