ITAD Ruling No. 113-04

October 26, 2004 ITAD RULING NO. 113-04 Art. 10, Philippines-Singapore Tax Treaty Sec. 108 of the NIRC of 1997 BIR Ruling No. DA-ITAD-45-04 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 letter dated May 26, 2004, requesting for tax treaty relief on the dividend payments by your client, SKF Philippines, Inc. (SKF-Philippines) to SKF South East Asia & Pacific Pte. Ltd. (SKF-Singapore) to be subject to a preferential tax rate pursuant to Article 10 of the Philippines-Singapore tax treaty. It is represented that SKF-Singapore is a nonresident foreign corporation duly organized and existing under the laws of Singapore with principal office at No. 1 Changi South Lane, Singapore 486070; that SKF-Singapore is not registered either as corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission (SEC) dated June 7, 2004; that SKF-Philippines is a corporation organized and existing under the laws of the Philippines with principal office at U-302 Alegria Bldg. 2229 Pasong Tamo Extension, Makati City; that SKF-Singapore is a stockholder of record of SKF-Philippines and holds Thirty-Eight (38) shares equivalent to Three Hundred Eighty Thousand Pesos (PhP380,000), constituting 0.88% of the total shares of SKF-Philippines; and that on April 29, 2004, the Board of Directors of SKF-Philippines unanimously approved the declaration of dividends to all stockholders of the corporation as of December 31, 2003 in the amount of Seven Million Five Hundred Thousand Pesos (PhP7,500,000.00), which shall be payable to all stockholders of SKF-Philippines on or before May 30, 2004. In reply, please be informed that Article 10 of the Philippines-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: a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of 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 amount of the dividends. AIcECS 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 dividends applies whenever the recipient who is the beneficial owner of the dividends owns at least 15 percent of the outstanding voting shares of the company paying the dividends and such shareholdings should have existed during the part of the taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year; and 25 percent preferential tax rate in all other cases. Such being the case, and considering that SKF-Singapore holds only 0.88% of the shares of stock of SKF-Philippines, this Office is of the opinion and so holds that the dividend payments by SKF-Philippines to SKF-Singapore shall be subject to the preferential tax rate of 25 percent pursuant to Article 10(2)(b) of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD-45-04 dated May 3, 2004) 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