Manabat San Agustin & Co.

March 7, 2007 BIR RULING [DA-140-07] 28 (B) (5) (b); DA296-06 Manabat San Agustin & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Myrna Q. Banzon Partner, Tax & Corporate Services Gentlemen : This refers to your letter dated February 14, 2007 requesting confirmation that dividends paid to your client, Artisan Funds, Inc. (AFI), from investments in Philippine domestic shares shall be subject to the final withholding tax of 15% pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997. IaAScD It is represented that AFI is a foreign corporation organized and existing under the laws of the United States of America (USA); that AFI is an open-end investment company registered with the U.S. Securities and Exchange Commission pursuant to the Investment Company Act of 1940, as amended, and under Wisconsin Statutes; that at present, AFI has nine different mutual fund series registered under the U.S. Securities Act of 1933; that out of the. nine (9) mutual funds, the following funds of AFI may invest in Philippine domestic shares: 1. Artisan International Fund, which pursues long-term capital growth by investing primarily in non-US companies of all market capitalizations; 2. Artisan International Small Cap Fund, which pursues long-term capital growth by investing primarily in small non-US companies; 3. Artisan International Value Fund, which pursues long-term capital growth by investing primarily in undervalued non-US companies of all market capitalizations; and 4. Artisan Emerging Markets Fund, which pursues long-term capital growth by investing primarily in companies whose primary business activities are in emerging markets. IcEACH that the immediately above enumerated mutual fund portfolios of AFI in the Philippine domestic companies may eventually derive dividends paid by Philippine domestic companies; and that in support of your request, you have submitted the following documents, to wit: a. AFI's Articles of Incorporation duly notarized by a US Notary Public and authenticated by the Philippine Embassy having jurisdiction; and b. A Securities and Exchange Commission negative certification that AFI is not registered in the Philippines as a corporate entity doing business in the Philippines. In reply thereto, please be informed that prior to its amendment by R.A. No. 9337, Section 28(B)(5)(b) of the Tax Code of 1997 provides that "Sec. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (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 nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippine equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph;" EaSCAH Under the above provision, if the country of domicile of the recipient corporation, in this case the U.S., allows as credit against the tax imposable by it an amount equivalent to 17% of the dividends remitted from a Philippine domestic corporation to corporations domiciled therein, the dividends remitted are subject to a final withholding tax at the rate of 15%. With the passage of R.A. No. 9337, which took effect on November 1, 2005, the tax sparing requirement on regular income tax rate on dividends was increased from 32% to 35%, as follows: "SEC. 2. Section 28(A)(1) and (B)(1) and (5)(b) of the same Code, as amended, are hereby further amended to read as follows : Sec. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation . xxx xxx xxx (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 nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident 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%) tax 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;" Correspondingly, the required tax sparing credit was increased from 17% to 20% starting November 1, 2005 until the end of year 2008, after which the tax sparing credit shall be 15%. AHECcT The Supreme Court En Banc, in the Case of Commissioner of Internal Revenue vs. Procter and Gamble Philippines Manufacturing Corporation, G.R. No. 66838 dated December 2, 1991, has ruled that Sections 901 and 902 of the U.S. Internal Revenue Code meets the deemed tax paid requirement provided under then Sections 25 (b) (5) (B) of the Tax Code of 1993, which is now Section 28 (B) (5) (b) of the Tax Code, as amended; consequently, a sufficient basis for the applicability of the 15% final withholding tax rate thus: "It is important to note that Section 24(b)(1), NIRC, does not require that the U.S. must be a 'deemed paid' tax credit for the dividend tax (20% points) waived by the Philippines in making applicable the preferred dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the U.S. tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the U.S. 'shall allow' P&G-USA a 'deemed paid' tax credit in the amount equivalent to the twenty (20) percentage points waived by the Philippines. SEIcHa xxx xxx xxx It is also useful to note that both (i) the tax credit for the Philippines dividend tax actually withheld, and (ii) the tax credit for the Philippines corporate income tax actually paid by P&G Phil. but 'deemed paid' by P&G-USA, are credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the U.S. congressional desire to avoid or reduce double taxation of the same income stream. xxx xxx xxx Corollarily, this Office had already ruled on the matter when it said in BIR Ruling No. 080-92 that " . . . considering that under the present provisions of the U.S. Federal Tax Code, the amount of tax deemed paid on such dividends, and accordingly, to be credited against U.S. tax on said dividends, meets the 20% requirement of Section 25(b)(5)(B) of the Tax Code, as amended, dividends which Avon Cosmetics, Inc. will remit to Avon Products, Inc. domiciled in the US are subject to withholding tax at the rate of 15% only which is within the maximum ceiling of the 20% tax of the gross amount of the dividends as provided in Article 11(2)(b) of the RP-US Tax Treaty. (see en banc Resolution of the Supreme Court dated December 2, 1991 in Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corporation G.R. No. 66838) . " CITaSA In the same vein, this Office had previously confirmed that a corporation, which was incorporated under the laws of the US, is subject to fifteen percent (15%) of the amount of dividend received based on Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling Nos. 275-88 dated June 28, 1988, and ITAD Ruling Nos. 175-00 dated November 14, 2000 and 097-06) Consequently, whether the tax sparing credit is 17%, 20% or 15%, dividends received from a Philippine corporation by a corporation incorporated out and domiciled in the US are subject to the preferential tax rate of 15%. In other words, the amendment by R.A. No. 9337 of Section 28(B)(5)(b) of the Tax Code of 1997, increasing the tax sparing credit from 17% to 20%, has no effect on the qualification of a non-resident US corporation, such as AFI, to avail of the preferential rate of 15% withholding tax on dividends considering that the U.S. allows a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines. TaHDAS IN VIEW OF THE FOREGOING, this Office hereby confirms your opinion that dividends received by AFI from Philippine domestic corporations are subject to the 15% preferential withholding tax rate under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended by R.A. No. 9337. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service