BIR Ruling

November 25, 1975 Messrs. Sycip, Salazar, Feliciano, Hernandez & Castillo 3rd Floor, Far East Building Buendia Avenue, Makati, Rizal Gentlemen : This refers to your letters dated July 1 and 3, 1975 requesting information as to the rate of tax that should be withheld by your client, Bradmill Industries Philippines Inc., on the dividends which it will remit to its Australian shareholder, Bradmill Industries (Queensland) Pty. Limited. It appears that your client is a domestic corporation while the recipient corporation is organized under the laws of Australia and is not engaged in trade or business in the Philippines. Under Section 24(b) of the Tax Code, as amended, the domestic corporation is liable for the payment of the 15% withholding tax "subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this section . . ." In other words, to be subject to the tax of 15%, it must be shown that Australia in which Bradmill Industries (Queensland) Pty. Limited is domiciled, grants credit against the tax due from it, taxes deemed to have paid in the Philippines equivalent to 20%. cdt The pertinent provision of the Australian Income Tax Assessment Act 1936-1974 provides: "s. 46 (2) Subject to this section, a shareholder, being a company that is a resident, is entitled to a rebate in its assessment in respect of income of the year of income of the amount obtained by applying the average rate of tax payable by the shareholder (a) if the shareholder is a private company in relation to the year of income, to the sum of (i) one-half of the part of any private company dividends that is included in its taxable income; and (ii) the part of any other dividends that is included in its taxable income; and (b) if the shareholder is not a private company in relation to the year of income, to the part of any dividends that is included in its taxable income." In his letter dated June 12, 1975 to Messrs. Allen Allen and Hemsley, 2 Castlereagh Street, Sydney, duly authenticated by the Philippine Consulate General of Sydney, Australia, the Deputy Commissioner of Taxation, Australian Taxation Office, explained the operation and effect of the foregoing provision of the Australian Income Tax Law on dividends from sources outside of Australia and received by public companies residing in Australia, as follows: "As Bradmill Industries (Queensland) Pty Ltd is a public company for the purposes of the abovementioned Act section 46(2)(b) applies. Under that paragraph a company which is not a private company for tax purposes in relation to a year of income is entitled to a rebate of tax in respect of all dividends included in its taxable income whether received from resident or non-resident public or private companies, whether paid out of Australian or ex-Australian profits and whether or not the dividends or profits our of which they have been paid have borne tax in any country. The amount of rebate is calculated by applying to the part of any dividends included in taxable income the average rate of tax payable by the company . cd "Pursuant to sub-section (6) of section 46, the average rate of tax payable by a company is deemed to be an amount per dollar ascertained by dividing the amount of taxable income the amount of tax that would be payable by the company if it were not entitled to any rebate or credit. "The reference in sub-section (6) to an average rate of tax was necessary because in former years two rates of tax were levied on companies: the first being levied on the first $10,000 of taxable income and the second (a higher rate) being levied on the excess over $10,000. At present a single rate of company tax equal to 45 cents in the dollar or 45% of the taxable income applies to both public and private companies. " In practical effect the law requires a dividend received by an Australian public company to be brought into its accessible income and to the extent that dividend is subject to Australian tax a credit (termed a rebate) equal to the Australian tax levied is allowed . At current rates of tax the credit is equal to 45% of the dividend included in the taxable income . "A part of a dividend is sometimes excluded from the taxable income where, for example, a dividend received from a resident mining company is partially exempt from tax; but where any part of a dividend is so excluded the tax position of an Australian public company is the same as it would have been if the dividend had been wholly taxed at the company rate of tax and a rebate or credit of the same rate had been allowed." (Emphasis ours) From the foregoing provisions of Section 46 of the Australian Income Tax Assessment Act 1936-1974 and the explanation of the Australian Taxation Office, it is clear that Australia allows a credit of 45% of the dividends to be remitted by your client to its Australian shareholder which exceeds the 20% difference between the regular tax of 35% and the reduced tax of 15% on dividends. In view thereof, the withholding tax rate of 15% applies on the dividends which your client, will remit to its Australian shareholder, Bradmill Industries (Queensland) Pty. Limited. Very truly yours, (SGD.) EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."