ITAD BIR Ruling No. 341-14

December 29, 2014 ITAD BIR RULING NO. 341-14 Article 10, Philippines-Italy tax treaty Ms. Arlene Singca 1225 Tangile Street L & S Subdivision Barangay Santo Domingo, Angeles City Attention: Ms. Arlene Singca Accounting Officer Gentlemen : This refers to your tax treaty relief application (TTRA) filed on November 23, 2011 requesting for confirmation that the dividends to be paid by O & G Leather Manufacturing Corporation ("O&G Phil") to Simonetta Bonini ("Ms. Bonini") are subject to preferential income tax rate pursuant to the Convention between the Government of the Republic of the Philippines and the Government of the Republic of Italy for the Avoidance of Double Taxation with Respect to Taxes on Income and to Prevent Fiscal Evasion ("Philippines-Italy tax treaty"). It is represented that Ms. Bonini is a non-resident individual with principal address at No. 8 via Matteo Tondi, Roma, Italia based on her Certificate of Residence issued by the tax authority of Italy on June 23, 2011; that Ms. Bonini has no existing business names registered under her name with the Department of Trade and Industry ("DTI") based on the Certification issued by DTI on November 18, 2011; and that, on the other hand, O&G Phil is a domestic corporation with principal business address at Building 4A1-2 Philexcel Business Park, Clark, Pampanga. It is further represented that on November 15, 2010, the Board of Directors of O&G Phil declared cash dividends of PhP20.00 per share for all stockholders on record as of November 15, 2010 and appropriating the funds thereof from unrestricted portion of retained earnings as of December 31, 2009 based on the Secretary's Certificate dated October 19, 2011 issued by O&G Phil; that as of the date of declaration of dividends on November 15, 2010, Ms. Bonini holds 14,000 shares in O&G Phil with par value of PhP100.00 per share amounting to 1,400,000.00 or 3.50 percent of the total shares of O&G Phil; that the said dividends shall be payable no later than January 28, 2012 based on Board of Resolution No. 8-11-11-A issued by the Board of Directors of O&G Phil on November 8, 2011. aIcHSC It is finally represented that the issue or transaction subject of the above application is 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 Sworn Statement issued by the Corporate Secretary of O&G Phil on November 9, 2011. In reply, please be informed that Section 25 (B) of the National Internal Revenue Code of 1997, as amended, provides that dividends derived by Ms. Bonini, being a non-resident individual not engaged in trade or business in the Philippines, are subject to income tax at the rate of 25 percent, thus: "SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. xxx xxx xxx" However, Section 32 (B) (5) of the same Code provides that such dividends may be exempt or partially exempt from income tax (if subject to a reduced rate only) 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. xxx xxx xxx" For this purpose, you invoke the Philippines-Italy tax treaty. Paragraphs 1 and 2, Article 10 thereof provide: HCISED "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 fifteen per cent of the gross amount of the dividend. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 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. 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, a trade of 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 dividends are taxable in that other Contracting State according to its own law. 6. Where a company which is a resident of a Contracting State derived profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or undistributed profits consist wholly or partly of profits or income arising in such other State. TAIDHa 7. Nothing in this Convention shall be construed as preventing a Contracting State from imposing on this earnings of a company attributable to a permanent establishment in that State, tax in addition to the tax which would be chargeable on the earnings of a company which is a national of that State, provided that any additional tax so imposed shall not exceed 20 per cent of the amount of such earnings which have not been subjected to such additional tax in previous taxation years. For the purpose of this provision, the term "earning" means the profits attributable to a permanent establishment in a Contracting State in a year and previous years after deducting therefrom all taxes, other than the additional tax referred to herein, imposed on such profits by that State." (underscoring ours) Based on the aforequoted provisions, dividends arising in the Philippines and paid to a resident of Italy may be taxed in the Philippines but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed fifteen per cent of the gross amount of the dividend. Accordingly, since Ms. Bonini, the beneficial owner of the dividends, does not carry on trade or business through a permanent establishment in the Philippines nor performs in the Philippines professional services from a fixed base situated therein, this Office is of the opinion and so holds that the dividends are subject to a preferential tax rate of 15 percent pursuant to Article 10 (2) of the Philippines-Italy 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 Bureau of Internal Revenue