ITAD Ruling No. 083-02

May 2, 2002 ITAD RULING NO. 083-02 RP-UK Article 9 BIR Ruling No. ITAD-75-00; 187-00 Thomas Cook (Philippines), Inc. 3/F, Metrobank Bankers Center Corner Julia Vargas & Miguel Avenues Ortigas Center, Pasig City 1600 Attention: Michael A. Roxas Senior Manager, Accounts Gentlemen : This refers to your letter dated July 24, 2001 requesting for confirmation of your opinion that the applicable tax treaty rate on the dividends to be paid by Thomas Cook (Philippines), Inc. (TCPI) to its parent company, Thomas Cook Group, Ltd. (Thomas Cook-UK), is 15% pursuant to the provisions of the RP-UK tax treaty. It is represented that Thomas Cook-UK is a non-resident foreign corporation duly organized and existing under the laws of England with principal address at 45 Berkely Street, London; that Thomas Cook-UK has a branch in the Philippines, Thomas Cook Ltd. (Philippine Branch), which is engaged in the issuance of travel cheques and purchase and sale of currency notes pursuant to Certificate of Authority from Central Bank and Securities and Exchange Commission License No. 665; that Thomas Cook-UK holds 40% of the total subscribed shares of TCPI. In reply, please be informed that Article 9 paragraph 1 of the RP-UK tax treaty provides, viz : "Article 9 Dividends "1. Dividends derived from a company which is a resident of the Philippines by a resident of the United Kingdom may be taxed in the United Kingdom. Such dividends may also be taxed in the Philippines but where such dividends are beneficially owned by a resident of the United Kingdom the tax so charged shall not exceed: "(a) 15 per cent of the gross amount of the dividends if the beneficial owner is a company which controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; "(b) in all other cases, 25 per cent of the gross amount of the dividends. "xxx xxx xxx "4. 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 corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident and also includes any other item (other than interest relieved from tax under the provisions of Article 10 of this Convention) which, under the law of the Contracting State of which the company paying the dividend is a resident, is treated as a dividend or distribution of a company. "5. The provisions of paragraphs 1, 2 and 3 of this Article shall not apply, if the beneficial owner of the dividends, being a resident of a Contracting State, carries on a trade or 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 professional 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 a case the provisions of Article 7 or 13, as the case may be, shall apply. xxx xxx xxx" Based on the foregoing, dividend paid to a company which is a resident of UK and which does not have a permanent establishment in the Philippines will be taxed at a preferential rate not exceeding fifteen per cent (15%) of the gross amount of dividends if said recipient is a company which owns at least ten per cent (10%) of the voting power in the company paying the dividends, and a rate not exceeding twenty five per cent (25%) of the gross amount of the dividends in all other cases. In view of the foregoing, and since Thomas Cook-UK hold more than ten per cent (10%) of the total subscribed shares of TCPI, the dividend remittance to Thomas Cook-UK is subject to the preferential tax treaty rate of fifteen per cent (15%) based on the gross amount of dividends, notwithstanding, the fact that Thomas Cook-UK has a branch in the Philippines considering that the investment was made independently by Thomas Cook-UK and not through the Philippine branch. This being the case, the dividend income cannot be attributed as an ordinary consequence of Thomas Cook-UK's trade or business in the Philippines pursuant to the RP-UK tax treaty. (Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Appeals, G.R. No. 76573, September 14, 1989, 177 SCRA, 500; ITAD 75-00 dated June 16, 2000; BIR Ruling ITAD-187 dated December 7, 2000). It is understood that the obligations to deduct and withhold the tax arises at the time that the cash dividend is paid or payable, whichever comes first. The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. Accordingly, the obligations to deduct and withhold the tax arise at the time the cash dividends become payable in accordance with the terms of the resolution of the Board of Directors. Also, the due date is within 10 days from the end of month that it becomes paid or payable. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service