ITAD BIR Ruling No. 396-12

December 19, 2012 ITAD BIR RULING NO. 396-12 Article 10 (Dividends) Philippines-Switzerland tax treaty; BIR Ruling No. ITAD 53-10 Philip Morris Phils. Mfg., Inc. 27th Floor, Tower I, The Enterprise Center, 6766 Ayala Ave., Makati City Attention: Mitchell Gault Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 06 July 2012 requesting confirmation that dividends paid by Philip Morris Philippines Manufacturing, Inc. ("Philip Morris-Philippines") to Philip Morris Brands Sarl ("Philip Morris-Switzerland") are subject to final withholding tax at the preferential rate of ten percent (10%) pursuant to The Convention between the Republic of the Philippines and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income ("Philippines-Switzerland tax treaty") . It is represented that Philip Morris-Switzerland is a non-resident foreign corporation organized and existing under the laws of Switzerland with principal address at Quai Jeanrenaud 3, 2000 Neuchatel, Switzerland based on a consularized and authenticated Proof of Residency dated 18 July 2012 issued by Department de la Justice, De la Securities et des Finances. It is organized for acquisition, holding and disposal of Swiss and foreign companies of any nature; acquisition, administration or disposal of patents, trademarks, copyrights, designs and other intellectual property rights based on the consularized and authenticated Articles of Incorporation of Philip Morris-Switzerland issued by the competent Swiss government agency. Philip Morris-Switzerland is not registered as a corporation or as a partnership based on a Certification of Non-Registration of Company issued by the Securities and Exchange Commission on 16 July 2012. On the other hand, Philip Morris-Philippines is a corporation organized and existing under the laws of the Philippines with principal address at 27th Floor, Tower I, The Enterprise Center, 6766 Ayala Avenue, Makati City. It is further represented that as of 30 June 2012, Philip Morris-Philippines has a total outstanding stock of Five Hundred Thirty Million Pesos (Php530,000,000.00) divided into 530,000 shares with par value of One Thousand Pesos (Php1,000.00/per share) and Philip Morris-Switzerland owns 529,995 shares or 99.999% of the outstanding shares of Philip Morris-Philippines and that on 05 July 2012, Philip Morris-Philippines declared cash dividends in favour of Philip Morris-Switzerland in the amount of Php2,000,000,000.00 out of unrestricted retained earnings based on the notarized Secretary's Certificate of Philip Morris-Philippines. Further, on 09 July 2012, Philip Morris-Philippines remitted the amounts of US$5,978,715.77, US$7,178,750.90, US$5,983,724.27, and US$23,919,872.44 with reference numbers FX38684-209460; TOD0721917086134 and 3552191289, respectively, based on a notarized statement of Mr. Gault with attached corresponding certifications from the following banks: Australian and New Zealand Banking Group Limited; Philippine National Bank and Citibank. HSDCTA It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal. In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997"), as amended, dividends paid to Philip Morris-Switzerland are subject to income tax at the rate of 30 percent, thus: "SEC. 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 interests, 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) and (d) above: * Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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: EcHIDT 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." For this purpose, you invoke the Philippines-Switzerland tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: "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 also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of the 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 beneficial owner is a company (excluding partnerships) which holds directly at least 10 per cent of the capital of the paying company: b) 15 per cent of the gross amount of the dividends in all other cases. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of these limitations. THEDcS 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 taxation law of that State of which the company making the distribution is a resident." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of Switzerland may be taxed in the Philippines at a rate not to exceed (a) 10% if the company recipient of the dividends holds directly at least 10% of the capital of the paying company; and (b) 15% in all other cases. Considering that Philip Morris-Switzerland owns 99.999% shares in Philip Morris-Philippines, which is more than the 10 percent shareholding requirement to avail of the 10 percent rate, the dividends paid by Philip Morris-Philippines to Philip Morris-Switzerland are subject to the preferential tax rate of 10 percent of the gross amount thereof pursuant to Article 10 (2) (a) of the Philippines-Switzerland tax treaty, as amended. (BIR ITAD Ruling No. 53-10) 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 of Internal Revenue