ITAD Ruling No. 045-04

May 3, 2004 ITAD RULING NO. 045-04 Article 10, RP-Singapore Sec. 108, NIRC BIR Ruling No. DA-ITAD No. 53-03 Tam-Yap & Associates Unit 411, Ferros Bel-Air Tower 30 Polaris corner Durban Streets Bel-Air, Makati City Attention: Ms. Teresa R. Tam-Yap Gentlemen : This refers to your letters dated July 11, 2003 and February 19, 2004 requesting confirmation of your opinion that the dividend payments of your client, SKF Philippines, Inc. (SKF Phil) to SKF South East Asia & Pacific Pte. Ltd. (SKF Singapore), are subject to a preferential tax rate pursuant to Article 10 of the RP-Singapore tax treaty. It is represented that SKF Singapore is a nonresident foreign corporation duly organized and existing under and by virtue of the laws of Singapore with principal office address at No. 1 Changi South Lane, Singapore; that SKF Singapore has been authorized to establish a representative office in the Philippines pursuant to Certificate of Authority No. 1834 dated September 25, 1987 issued by the Board of Investments which has been subsequently cancelled in 1990 for failure to pursue the authorized business activity; that to date, SKF Singapore has no business presence in the Philippines; that SKF Singapore is not registered either as corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated June 10, 2003; that SKF Phil, on the other hand, is a domestic corporation organized and existing under Philippine laws with principal office at U-302 Alegria Bldg. 2229 Chino Roces Ave., Makati City; that SKF Singapore is a stockholder of record of SKF Phil and holds Thirty-Eight (38) shares equivalent to Three Hundred Eighty Thousand Pesos (Php380,000), constituting 0.88% of the total shares of SKF Phil; and that on April 30, 2003, the Board of Directors of SKF Phil declared cash dividends in the amount of Ten Million Pesos (Php 10,000,000.00) to all of its stockholders of record as of May 15, 2003, payable on or before June 30, 2003. In reply, please be informed that Article 10 of the RP-Singapore tax treaty provides as follows: "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 be 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: DIcSHE 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 percent of the gross amount of the dividends. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The provisions of paragraphs 1 and 2 shall not affect the taxation of the company in respect of 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, founder's 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. "xxx xxx xxx" Based on the above-cited provisions, the 15 percent preferential tax rate on dividend applies whenever the beneficial owner/recipient of the dividend owns at least 15 percent of the outstanding voting shares of the paying company and such shareholdings should have existed during the part of the taxable year immediately preceding the date of payment of the dividend and during the whole of its prior taxable year, and 25% tax rate in all other cases. Such being the case, considering that SKF Singapore holds only 0.88% of the shares of stock of SKF Phil, this Office is of the opinion and so holds that the dividend payments by SKF Phil to SKF Singapore shall be subject to the preferential tax rate of 25% pursuant to Article 10(2)(b) of the RP-Singapore tax treaty. ( BIR Ruling No. DA-ITAD 53-03 dated April 9, 2003 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service