ITAD Ruling No. 119-04

October 27, 2004 ITAD RULING NO. 119-04 Article 12 Philippines-Singapore tax treaty DA-ITAD-53-03 Roxas De Los Reyes Laurel & Rosario Law Offices 19/F 1st e-Bank Tower, 8737 Paseo de Roxas Makati City 1200 Attention: Anna Melissa R. Lichaytoo Rommel R. Ramos Gentlemen : This refers to your letter dated August 3, 2004 requesting confirmation that the dividend payments of Micro-Mechanics Technology International, Inc. (Micro-International) to Micro-Mechanics (Holdings) Ltd. (Micro-Holdings) are subject to a 15% preferential tax rate pursuant to Article 12 of the Philippines-Singapore tax treaty. It is represented that Micro-Holdings is a nonresident foreign corporation duly organized and existing under the laws of Singapore with business address at 31 Kaki Bukit Place, Eunos Techpark, Singapore 416209; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated July 26, 2004; that Micro-International is a domestic corporation with office address at Lot B2-1C Carmelray Industrial Park II, Brgy. Tulo, Calamba, Laguna; that as of December 31, 2002 Micro-Holdings is the registered owner of 99.99% of the outstanding capital stock of Micro-International as shown in the certification issued by the Assistant Corporate Secretary of Micro-International dated January 24, 2003; that on April 12, 2004 the Board of Directors of Micro-International declared cash dividends in the amount of Ten Million Pesos (P10,000,000.00) to be taken out from the company's unrestricted retained earnings as reflected in its unaudited financial statements as of March 31, 2004, payable to all shareholders of record as of April 1, 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. cIACaT "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 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 amount of the dividends. "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 aforequoted provision, the 15 percent preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividends 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 paying company's taxable year immediately preceding the day of payment of the dividends and during the whole of its prior taxable year, if any. Since Micro-Holdings holds 99.99% of the total shares of Micro-International during the part of the latter's taxable year immediately preceding the day of payment of the dividends, dividends received by Micro-Holdings shall be subject to the preferential tax rate of 15 percent pursuant to Article 10(2)(a) of the Philippines-Singapore tax treaty. (BIR Ruling DA-ITAD 53-03 dated April 9, 2003) This ruling is issued based on 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