ITAD Ruling No. 031-99

October 7, 1999 ITAD RULING NO. 031-99 Article 11, RP-US Tax Treaty Article 10, RP-Singapore Tax Treaty Article 1 & 3, RP-UK Tax Treaty 044-82 Maria Corazon B. Esquela Manager Software Ventures International 6/F, The JMT Corporate Condominium ADB Avenue, Ortigas Center Pasig City 1600 M a d a m : This refers to your application for relief from double taxation dated May 31, 1999, on behalf of Pacven Walden Ventures III, L.P. (PWV), O W & W Pacrim Investments Limited (OWW), Info Tech Ventures Limited (ITV), Nikko Pacven Walden Ventures Limited (NPW), and Sino-French Capital Investment Co. (SFC), requesting for a preferential tax rate to be withheld on your dividend remittances, pursuant to the RP-US, RP-Singapore, and RP-UK Tax Treaties. It is represented that Software Ventures International Corporation (SVI) is a corporation organized and existing under the laws of the Philippines, and is registered with the Board of Investments as per Certificate of Registration No. EP 98-158 dated November 26, 1998; that during the regular meeting of SVI's Board of Directors held on December 3, 1998, it was resolved that the portion of the 1998 unrestricted retained earnings be declared as cash dividends to all stockholders; that PWV, OWW, ITV, NPW, and SFC are stockholders of SVI as of December 31, 1998, and their respective percentage of ownership are as follows: 10.86%, 1.48%, 0.47%, 2.008%, and 1.35%; that PWV is a limited partnership existing and organized under the laws of the State of Delaware, USA, with business address at 32 Loockerman Square, Suite C-100, Dover, Delaware, USA; that OWW and ITV are corporations organized and existing under the laws of Singapore, with business addresses at 20 Raffles Place, #17-00 Ocean Towers, Singapore, and 396 Alexandra Road, #16-03 BP Tower, Singapore, respectively; that NPW and SFC are corporations organized and existing under the laws of the Cayman Islands, British West Indies, with business addresses at Ugland House, South Church Street, Grand Cayman, Cayman Islands, British West Indies, and George Town, Grand Cayman, Cayman Islands, British West Indies, respectively; and that PWV, OWW, ITV, NPW, and SFC have no permanent establishment in the Philippines as per the certifications issued by the Securities and Exchange Commission. cdll In reply, please be informed of the following: I. FOR PWV : Article 11 of the RP-US Tax Treaty provides, viz : "Article 11 " DIVIDENDS "(1) Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. "(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed: (a) 25 percent of the gross amount of the dividend; or (b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation. "xxx xxx xxx" Applying the foregoing provision, the preferential tax rate to be withheld by SVI on its dividend remittance to PWV shall be twenty five percent (25%), since no representation nor proof whatsoever was presented to this Office as will warrant the grant of the preferential tax rate of twenty percent (20%) under paragraph (2)(b) above. II. FOR OWW and ITV : Article 10 of the RP-Singapore Tax Treaty provides, viz : "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 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: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and b) in all other cases, 25 per cent of the gross amounts of the dividends. "The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. "xxx xxx xxx" Applying the foregoing provision, the preferential tax rate to be withheld by SVI on its dividend remittances to OWW and ITV shall be twenty five percent (25%) of the gross amounts of the dividend considering that their percentage of ownership did not qualify with the minimum requirement prescribed in paragraph 2 (a) above. (BIR Ruling No. 044-82) III. FOR NPW and SFC : Articles 1 and 3 of the RP-UK Tax Treaty provides, viz : "Article 1 " Personal Scope "1. This Convention shall apply to persons who are residents of one or both of the Contracting State. "xxx xxx xxx" "Article 3 " General Definitions "1. In this Convention, unless the context otherwise requires: (a) the term 'United Kingdom' means Great Britain and Northern Ireland, including any area outside the territorial sea of the United Kingdom which in accordance with international law has been or may hereafter be designated, under the laws of the United Kingdom concerning the Continental Shelf, as an area within which the rights of the United Kingdom with respect to the sea bed and sub-soil and their natural resources may be exercised; "xxx xxx xxx" (f) the terms 'a Contracting State' and 'the other Contracting State' mean the Philippines or the United Kingdom, as the context requires. "xxx xxx xxx" It is clear from the said Article 1 that the RP-UK Tax Treaty applies only to residents of the United Kingdom (UK) and/or the Philippines. The term "United Kingdom", as defined in paragraph 1(a) Article 3 above, does not include other territories of, or states dependent to, the UK. This may be inferred from the said definition since it only speaks of Great Britain and Northern Ireland, its territorial sea, and its continental shelf as therein provided. Nothing is mentioned on whether the said Tax Treaty shall apply, with same force and effect, to other territories or dependent states over which the UK exercises sovereignty. Thus, NPW and SFC cannot avail of the provisions of the RP-UK Tax Treaty. The dividend income then of NPW and SFC shall be subject to the rate of tax provided for under Section 28(B)(5)(b) of the Tax Code of 1997. In view of all the foregoing, SVI should withhold a 25% tax on the dividend income of PWV, OWW, and ITV. With respect to the dividend income of NPW and SFC, the tax to be withheld should be based on the rate of tax provided for under Section 28(B)(5)(b) of the Tax Code of 1997. This ruling is issued based on the foregoing facts as represented. If upon investigation, it will be disclosed that the said facts are different, then this ruling shall be considered null and void. llcd Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue