Quisumbing Torres

January 17, 2007 BIR RULING [DA-021-07] 28 (B) (5) (b); DA 417-05 Quisumbing Torres 26th Street corner 3rd Avenue Crescent Park West Bonifacio Global City Taguig, Metro Manila Attention: Atty. Dennis G. Dimagiba and Atty. Franklin A. Prestousa Gentlemen : This refers to your letter dated July 12, 2006 stating that your client, Ecolab Philippines, Inc. (Ecolab Phil.), is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines with principal office address at 2/F Alabang Business Tower, Acacia Avenue, Madrigal Business Park, Ayala Alabang Village, Muntinlupa City; that on the other hand, Ecolab, Inc. (Ecolab US) is a corporation organized and existing under the laws of the State of Delaware in the United States with principal business address at 370 North Wabasha Street, St. Paul, MN 55102-1307, USA; that Ecolab US owns shares of stock in Ecolab Phil. equivalent to 99.99% of the latter's outstanding and subscribed capital stock; and that Ecolab Phil. intends to declare cash dividends in favor of its sole corporate stockholder, Ecolab US, within this year. In connection therewith, you now request for confirmation of your opinion that the cash dividends to be declared by Ecolab Phil. and paid to Ecolab US are subject to a preferential tax rate of 15% pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. In reply thereto, please be informed that Section 28 (B) (5) (b) of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9337, provides that "(B) Tax on Nonresident Foreign Corporation . "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation . "(b) Intercorporate Dividends . A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, 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 twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%), on dividends as provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends." In applying the aforesaid section, this Office in BIR Ruling No. DA417-05 dated October 7, 2005 ruled that "Based on the foregoing, the regular income tax of thirty-two percent (32%) applicable to dividend remittances to non-resident foreign corporate stockholders of a Philippine corporation is reduced to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA shall allow tax credit in favor of TI for "taxes deemed paid in the Philippines" against its US taxes. "In the case of Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corp. (P&G) and Court of Tax Appeals , G.R. No. 66838, December 2, 1991, the Supreme Court in ruling that the USA domiciled stockholder of P&G is entitled to the preferential fifteen percent (15%) dividend tax rate further declared that the NIRC, as amended, does not in fact require that the "deemed paid" tax credit shall have actually been granted but merely that the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for "taxes deemed paid in the Philippines" as applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. "Following the said case, this Office has ruled in BIR Ruling No. 105-92 dated March 30, 1992 and BIR Ruling No. DA142-01 dated August 30, 2001, that dividends payable by a Philippine company to its U.S. parent company are subject to a 15% withholding tax. In the said ruling, this Office recognized that U.S. tax laws allow a credit against the tax due from the U.S. taxes deemed to have been paid in the Philippines equivalent to at least 20%. TDcEaH "Such being the case, your opinion that the dividends to be remitted by TI (Philippines), Inc. to TI are subject to the preferential tax rate of fifteen percent (15%) pursuant to Section 28(B)(5)(b) of the Tax Code of 1997, as amended, is hereby confirmed." Considering that the above-cited ruling is in all fours similar to the instant case, this Office holds that the dividends payable by Ecolab Phil. to Ecolab US are subject to a preferential tax rate of 15% pursuant to Section 28 (B) (5) (b), supra . This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner