BIR Ruling [DA-142-01]

August 30, 2001 BIR RULING [DA-142-01] Castillo Laman Tan Pantaleon and San Jose Law Offices 2nd, 3rd and 4th Floors, The Valero Tower 122 Valero Street, Salcedo Village Makati City, Metro Manila Attention: Atty. Ma. Victoria D. Sarmiento Gentlemen : This refers to your letter dated March 12, 2001 requesting on behalf of your client, Alchemco Philippines, Inc. ("Alchemco"), for a ruling on the applicable tax rate on its intended remittance of cash dividends to its foreign stockholder, General Chemical Industrial Products, Inc. ("GCIP"). It is represented that Alchemco is a domestic corporation, duly organized and existing under the laws of the Philippines, with principal office address at 2880 Lamayan Street, Sta. Ana, Manila; that all the outstanding shares of stock of Alchemco are beneficially owned by GCIP; that GCIP is a corporation duly registered and existing under the laws of the State of Delaware in the US, with principal business address at 1209 Orange Street, Wilmington City, New Castle, State of Delaware; that GCIP is not licensed to, nor does it, engage in trade or business in the Philippines; and that in support of your request, you submitted a consularized copy of the charter documents of GCIP, showing that it is a corporation incorporated and existing under US laws. In reply, please be informed that Section 28(B)(5) of the Tax Code of 1997 provides: "Section 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%) 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 percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this paragraph; aSIDCT xxx xxx xxx" In interpreting the above-quoted provision of the Tax Code, the Supreme Court had ruled in the case of Commissioner of Internal Revenue v. Procter and Gamble Philippine Manufacturing Corporation (204 SCRA 377) that the dividends payable to a U.S. corporate stockholder are subject to the preferential rate of 15% by reason of the tax credit provisions of the U.S. Ta x Co de. This is to say that a U.S. corporate stockholder is entitled to a tax credit for the amount of dividend tax actually paid (i.e., withheld) on the proportionate part of the corporate income tax actually paid to the Philippines by the Philippine declaring company. The only requirement under the U.S. tax credit provision is that the U.S. corporate stockholder must own at least 10% of the voting stock of the Philippine declaring corporation. The Supreme Court in the above-mentioned case further held that the Tax Code does not require the deemed-paid tax credit to have been actually granted before the applicable tax rate goes down from 35% to 15%. Following the said case, this Office has ruled in BIR Ruling No. 105-92, dated March 30, 1992, 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%. In view of the foregoing Supreme Court decision and facts as you represented, this Office rules that the cash dividends to be remitted to GCIP by Alchemco are subject to withholding tax at the rate of 15% only considering that GCIP has complied with the U.S. tax credit provision that it must own at least 10% of the voting stock of the Phil. declaring corporation. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigations, it will be disclosed that the facts are different, then this ruling shall be considered null and void. DTSIEc Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group