BIR Ruling

February 23, 1972 Messrs. Sycip, Gorres, Velayo & Co. P. O. Box 589, Manila Gentlemen : This refers to your letter dated February 7, 1972 requesting confirmation of your opinion to the effect that the declaration of dividends by the Insular Lumber Company to its non-resident alien stockholders in the year 1972 is not subject to the withholding of tax at source and that the dividends are not income from Philippine sources insofar as the non-resident alien recipients or stockholders of Insular Lumber Company are concerned. It is represented that Insular Lumber Company, is a foreign corporation engaged in trade or business in the Philippines through its branch; that for the years 1969, 1970 and 1971, the three-year period ending with the close of its taxable year preceding the declaration of the dividends in 1972, Insular Lumber Company's income from Philippine sources, the three years (1969 to 1971) taken together, is less than 50% of the company's gross income from all sources and is not more than 85% of the gross income of the corporation. In reply thereto, I have the honor to inform you that Section 53(b)(1) of the Tax Code provides that the deduction or withholding of tax at source shall not be required in the case of dividends paid by a foreign corporation unless (1) the corporation is engaged in trade or business within the Philippines, and (2) more than 85 per cent of the gross income of the corporation for the three-year period ending with the close of its taxable year preceding the declaration of the dividends was derived from sources within the Philippines. While Insular Lumber Company is engaged in trade or business in the Philippines, nevertheless not more than 85% of its gross income are from Philippine sources. Accordingly, it is not required to withhold any tax on the dividends it will declare in 1972 under Section 53(b)(1) of the Tax Code. Dividends received from a foreign corporation are considered as from Philippine sources only if 50% or more of the gross income of the foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends was derived from sources within the Philippines. (Section 37(a)(2)(B) of the Tax Code) The average of Insular Lumber Company's income from Philippine sources for the years 1969 to 1971 is allegedly less than 50% of its gross income for those years, hence the dividends to be declared by Insular Lumber Company are not considered income from Philippine sources. Accordingly, the dividends are not subject to income tax in the hands of the non-resident alien stockholders. It should be emphasized, however, that the above ruling is based on the representations that Insular Lumber Company's income from Philippine sources, for the three year period ending with the close of its taxable year preceding the declaration of the dividends in 1972, taken together, is less than 50% of the company's gross income from all sources and is not more than 85% of the gross income of the corporation and this Office may reverse or modify this ruling if upon investigation' it will appear that the facts are different from that upon which the ruling is predicated. Very truly yours, MISAEL P. VERA Commissioner of Internal Revenue