ITAD BIR Ruling No. 340-12

September 7, 2012 ITAD BIR RULING NO. 340-12 Article 10, Philippines-Singapore tax treaty; BIR Ruling No. ITAD 221-11 Agcaoili & Associates 7th Floor Citibank Center Paseo de Roxas, Makati City Attention: Ma. Carmen Agcaoili-Orea Gentlemen : This refers to your Tax Treaty Relief Application filed on January 4, 2012, on behalf of Essilor Philippines Holdings Pte., Ltd. ("Essilor Singapore") , requesting confirmation that dividends to be paid by Essilor Philippines Optical Distribution, Inc. ("Essilor Phil") are subject to the preferential tax rate of 15 percent pursuant to the Convention between the Republic of the Philippines and the Republic of 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 Essilor Singapore is a foreign corporation organized and existing under the laws of Singapore and a resident thereof situated at 215 KallangBahru, Singapore 339346, per Certificate of Residence issued by the Inland Revenue Authority of Singapore and the Memorandum of Association of Essilor Singapore; that Essilor Singapore is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated December 20, 2011; and that, on the other hand, Essilor Phil. is a corporation organized and existing under the laws of the Philippines with principal address at 4th Floor Shoppersgold Building, 464 Rizal Avenue, Sta. Cruz, Manila, Philippines. On December 7, 2011, the Board of Directors of Essilor Phil. declared a cash dividends of Php70,000,000.00 to stockholders as of said date to be payable beginning January 20, 2012 per Secretary's Certificate dated January 2, 2012; that as of the date of declaration of the cash dividends and up to the date of the filing of the TTRA, Essilor Singapore is the beneficial owner of the 650,000 shares of stock with a par value of P100.00 per share representing 100% of the total shares of Essilor Phil; and that, per Certification of the Corporate Secretary and Legal Counsel of Essilor Phil. dated January 2, 2011, the dividends subject of the application for tax treaty relief are not subject of an investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. cCaIET Ruling 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. (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. " EaIcAS 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. 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. caSEAH 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 of the 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 Essilor Singapore owns 100% of the outstanding shares of Essilor Phil. , during the part of Essilor Phil's 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 Essilor Phil. to Essilor Singapore are subject to the preferential rate of 15 percent withholding tax pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. ITAD 221-11 dated September 1, 2011) 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. CacEID Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue