ITAD BIR Ruling No. 356-15

December 11, 2015 ITAD BIR RULING NO. 356-15 Article 11, Philippines-India tax treaty BIOSTADT Philippines, Inc. Unit 802-803 Raffles Corporate Center, F. Ortigas, Jr. Road, Ortigas Center Pasig City 1605 Attention: Sofrania C. Jabigo Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on August 14, 2015, requesting confirmation that dividends paid to BIOSTADT INDIA LIMITED ("BIOSTADT-IND") by BIOSTADT PHILIPPINES, INC. ("BIOSTADT-PH") are subject to preferential tax rate of 15 percent pursuant to Article 11 of the Agreement between the Government of the Republic of the Philippines and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-India tax treaty") . It is represented that BIOSTADT-IND, a corporation organized and existing under the laws of India, and is a resident of India for tax treaty purposes based on the Certificate of Residence issued by the Office of the Dy. Commissioner of Income Tax 6 (1) (2) dated June 30, 2015; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-Registration of Company issued by the Securities and Exchange Commission dated August 13, 2015; and that, on the other hand, BIOSTADT-PH is a corporation organized and existing under the laws of the Philippines. It is further represented, that on September 26, 2014, the Board of Directors of BIOSTADT-PH declared cash dividends in the amount of Twenty Two Million Six Hundred Eighty Three Thousand Two Hundred Seventy Eight and 44/100 Pesos (Php22,683,278.44) to be taken out of its unrestricted retained earnings in favor of all the stockholders of record as of close of business on March 31, 2014; that BIOSTADT-IND is the beneficial owner of 1,124,000 common shares of BIOSTADT-PH, with par value of Php10.00 per share, for a total par value of Php11,240,000.00 constituting 99.99956% of the total outstanding capital stock of BIOSTADT-PH since July 8, 2014. It is finally represented, per the Sworn Statement dated August 12, 2015 issued by BIOSTADT-PH, 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 dividends derived in the Philippines by a nonresident foreign corporation which 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%)." 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 obligation binding upon the Government of the Philippines. xxx xxx xxx" Thus, Article 11 of the Philippines-India tax treaty, which you invoke, may apply to the instant case. It provides: cSEDTC "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 is the beneficial owner of the dividends, the tax so charged shall not exceed: a) 15 percent of the gross amount of the dividends if the beneficial owner is a company which owns at least ten per cent of the shares of the company paying the dividends; b) 20 per cent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. xxx xxx xxx 3. The term "dividends" as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 15, as the case may be, shall apply. . . ." Based on the above-cited provision, dividends arising in the Philippines and paid to a resident of India may be subject to income tax in the Philippines, but the rate of tax that may be imposed thereon shall not exceed 15 percent of the gross amount of the dividends if the recipient of the dividends is a company, and owns at least 10 percent of the capital of the paying company. In all other cases, the 20 percent preferential tax rate applies. In view thereof, such dividends paid by BIOSTADT-PH to BIOSTADT-IND, a resident corporation of India with no fixed place of business in the Philippines holding 99.99956 percent ownership of the capital of BIOSTADT-PH, are subject to the preferential tax rate of 15 percent of the gross amount thereof, pursuant to paragraph 2 (a), Article 11 of the Philippines-India tax treaty. 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