ITAD BIR Ruling No. 343-12

September 18, 2012 ITAD BIR RULING NO. 343-12 Article 10, Philippines-Netherlands tax treaty; BIR Ruling No. ITAD-037-10 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Wilfredo U. Villanueva Principal, Tax Services Gentlemen : This refers to your Tax Treaty Relief Application ("TTRA") filed on November 18, 2011 ,on behalf of Carrier HVACR Investments B.V. ("Carrier-Netherlands") ,requesting confirmation that the dividends paid by Carrier Air Conditioning Philippines, Inc. ("Carrier-Phil") to Carrier-Netherlands are subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 of the Convention between the Republic of the Philippines and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Netherlands tax treaty"). HCSDca It is represented that Carrier-Netherlands is a corporation organized and existing under the laws of The Netherlands with principal address at Strawinskylaan 3105, 1077 ZX Amsterdam, The Netherlands and is a resident thereof within the meaning of Article 4 of the Philippines-Netherlands tax treaty per the Declaration of Residence issued on October 19, 2011 by the Tax and Customs Administration of the Netherlands; that Carrier-Netherlands has an authorized share capital amounting to two hundred thousand Dutch guilders (NLG200,000) divided into two thousand (2,000) shares of one hundred Dutch guilders (NLG100) each; that it is not registered either as corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated November 14, 2011; and that, on the other hand, Carrier-Phil is a corporation organized and existing under the laws of the Philippines with principal address at Km. 20 East Service Road, South Superhighway, Alabang, Muntinlupa City 1771. It is further represented that at the special meeting of the Board of Directors of Carrier-Phil on November 2, 2011, a resolution was unanimously adopted declaring the total amount of Php150,333,970.00 as cash dividends, out of the unrestricted retained earnings of Carrier-Phil as of October 31, 2010; that a resolution was also approved authorizing the deduction from Php150,333,970.00, the 2009 Overpayment of Dividends, thus resulting in a net dividend payable of Php21,344,831.00 (the "Net Dividend Payable"),to be paid on or before November 30, 2011; that per the Corporate Secretary's Certificate issued by Carrier-Phil dated November 14, 2011, Carrier-Netherlands ,as of November 2, 2011 is the registered owner of 279,995 shares and beneficial owner through its nominees of 5 shares of outstanding stock, with a total par value of Php28,000,000.00 which represents 100% of the outstanding and voting shares of Carrier-Phil; and that, per the Certification issued by Citibank, the payments of the subject dividends were remitted to Carrier-Netherlands on November 25, 2011. It is finally represented per the Sworn Statement issued by Carrier-Phil on November 14, 2011, that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal. 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. 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%)." SaETCI 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." In relation thereto, Article 10 of the Philippines-Netherlands tax treaty, which you invoked, may apply to the instant case. It provides: "Article 10 DIVIDENDS 1. Dividends paid by a company which is a resident of one of the States to a resident of the other State may be taxed in that other State. 2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the recipient is a company the capital of which is wholly or partly divided into shares and which holds directly at least 10 per cent of the capital of the company paying the dividends; cIADTC b) 15 per cent of the gross amount of the dividends in all other cases. xxx xxx xxx 5. The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or 'jouissance' rights, mining shares, founders' shares or other rights participating in profits, as well as income from debt-claims participating in profits and income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation law of the State of which the company making the distribution is a resident. ..." Based on the above-cited provisions, the 10 percent preferential tax rate on dividends applies whenever the beneficial owner of the dividends is a company, the capital of which is divided into shares, and owns at least 10 percent of the capital of the paying company. In all other cases, 15 percent preferential tax rate applies. Such being the case and considering that Carrier-Netherlands is the registered owner of 279,995 shares of Carrier-Phil and the beneficial owner of 5 shares held by its nominees representing 100% of the outstanding shares of Carrier-Phil or more than 10 percent of the capital of Carrier-Phil, this Office is of the opinion and so holds that the dividend payments by Carrier-Phil to Carrier-Netherlands shall be subject to the preferential tax rate of 10 percent of the gross amount of the dividends pursuant to Article 10 (2) (a) of the Philippines-Netherlands tax treaty. (BIR Ruling No. ITAD-037-10 dated September 16, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue