ITAD BIR Ruling No. 363-15

December 16, 2015 ITAD BIR RULING NO. 363-15 Article 10, Philippines-Canada tax treaty Phelps Dodge International Philippines, Inc. 2/F BCS Prime Building 2297 Pasong Tamo Extension Makati City Attention: Hussien C. Busran Authorized Representative Gentlemen : This refers to your tax treaty relief application filed on September 4, 2014, on behalf of General Cable Company ("GCC") , requesting confirmation that dividends paid by Phelps Dodge International Philippines, Inc. ("Phelps") to GCC are subject to the preferential tax rate of 15 percent of the gross amount of the dividends pursuant to Article 10 of the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Canada tax treaty"). HSAcaE It is represented that GCC is a resident of Canada for income tax purposes for the tax year 2014 per the Certification issued on August 25, 2014 by the Canada Revenue Agency; 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 August 26, 2014; and that, on the other hand, Phelps is a corporation organized and existing under the laws of the Philippines. It is further represented that on April 23, 2014, the Board of Directors of Phelps declared cash dividend out of the surplus profits of Phelps equivalent to Two Hundred Thirty Eight Million Pesos (P238,000,000.00) or 50% of the 2013 net income of P218,000,000.00 plus 2012's adjustment on dividend payment of P20,000,000.00, to be paid pro-rata on or before September 29, 2014 to all stockholders of record as of December 31, 2013; that as of the date of record and expected to have the same shareholding on the date of payment of the subject dividends, GCC is the legal and beneficial owner of 3,539,960 shares with a total par value of P35,399,600 which represents 60 percent ownership in Phelps ; that the said shares are held by GCC since June 30, 2009. 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%)." 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-Canada tax treaty, which you invoked, may apply to the instant case. It provides: "Article X Dividends 1. Dividends paid by a company which is a resident of Canada to a resident of the Philippines may be taxed in the Philippines. However, such dividends may also be taxed in Canada, but where the beneficial owner of the dividends is a resident of the Philippines, the tax so charged shall not exceed 15 per cent of the gross amount of the dividends. 2. Dividends paid by a company which is a resident of the Philippines to a resident of Canada may be taxed in Canada. However, such dividends may also be taxed in the Philippines, but where the beneficial owner of the dividends is a resident of Canada the tax so charged shall not exceed: a) 15 per cent of the gross amount of any dividend paid to a company which is a resident of Canada which controls at least 10 per cent of the voting power of the company paying the dividend; or b) 25 per cent of the gross amount of the dividends in all other cases. HESIcT 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company on 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, founders' 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 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 VII or Article XIV, as the case may be, shall apply. . . ." Based on the above-cited provision, dividends paid by a company which is a resident of the Philippines to a resident of Canada may be taxed in Canada. However, such dividends may also be taxed in the Philippines, but where the beneficial owner of the dividends is a resident of Canada the tax so charged shall not exceed 15 per cent of the gross amount of any dividend paid to a company which is a resident of Canada which controls at least 10 per cent of the voting power of the company paying the dividend or, 25 per cent of the gross amount of the dividends in all other cases. In view thereof and considering that GCC, a resident of Canada with no fixed place of business in the Philippines, holds 60 percent ownership in Phelps , such dividends paid by Phelps to GCC are subject to the preferential tax rate of 15 percent of the gross amount thereof, pursuant to Article 10 of the Philippines-Canada 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