BIR Ruling [DA-149-04]

March 30, 2004 BIR RULING [DA-149-04] 28 (B) (5) (b); 208-89; DA-287-98 & DA-224-98 Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. Wilfredo U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated February 24, 2004 on behalf of your client; Bristol-Myers Squibb Philippines, Inc. (BMSPI), requesting confirmation of your opinion that the cash dividends that were declared by BMSPI and payable to Bristol-Myers Squibb Luxembourg International S. C. A. (BMSLUX), the latter being the 100% beneficial owner of the shares of stock of BMSPI, are subject to 15% withholding tax pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code (NIRC), as amended. It is represented that BMSPI is a corporation duly organized and existing under and by virtue of Philippine laws, with office address at 2309 Don Chino Roces Avenue Extension, Makati City that BMSLUX is a corporation duly organized and existing under and by virtue of the laws of Luxembourg; that since December 17, 2002, BMSLUX has been the beneficial owner of 1,397,500 shares representing the entire capital stock of BMSPI; that it has legal ownership of 1,347,376 shares of stock of BMSPI representing: 96.5%,while Bristol-Myers Squibb Company (BMSC) has legal ownership of 50,119 shares, with five (5) board members owning one nominee share each, all representing 3.5% of the outstanding capital stock of BMSPI; that BMSC is a corporation duly organized and existing under and by virtue of the laws of the United States; that as 100% beneficial owner of BMSPI, BMSLUX has the right to receive dividends inuring to 100% of the outstanding shares of BMSPI, including the 3.5% thereof being held by BMSC in trust for BMSLUX, as evidenced by the Declaration of Trust executed between BMSC and BMSLUX; that on February 17, 2004, BMSPI declared cash dividends in favor of its stockholders of record as of such date; that in a letter dated February 13, 2004 duly acknowledged by the Head of Tax Office of Luxembourg it has been confirmed that all of the conditions for the exemption from Luxembourg tax of the dividends declared by BMSPI in favor of BMSLUX, as laid down under Article 166 of the Luxembourg Corporate Income Tax Law and 60 of the Valuation Law, are met considering that BMSLUX is a fully taxable company in Luxembourg that has held a participation of 100% beneficial ownership (96.5% legal ownership) in BMSPI since December 17, 2002 and that BMSPI is a resident company subject to corporate income tax in the Philippines at the rate of 32%. On the basis of the foregoing facts, you requested for a confirmation of your opinion that the cash dividends declared by BMSPI and payable to BMSLUX as the 100% beneficial owner of BMSPI's shares of stock are subject to the withholding tax rate of 15% pursuant to Section 28(B)(5)(b) of the NIRC, as amended. In reply, please be informed that Section 28(B)(5)(b) of the Tax Code of 1997, as amended, provides: " Intercorporate Dividends . A final withholding tax at the rate of fifteen percent (15%0) 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, and 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 subparagraph." Based on the above provision, dividends declared by a domestic corporation in favor of a nonresident foreign corporation domiciled in a country that allows a credit of 17% (after the year 1999) on such dividends are subject to the withholding tax rate of 15%.Several rulings of this Office consistently held that the same 15% rate applies even more if the country of the recipient nonresident foreign corporation exempts from tax the dividends declared by the domestic corporation. ( BIR Ruling dated February 23, 1978; BIR Ruling Nos. 208-89 dated September 28, 1989, DA-287-7-1-98, and DA-224-98 ). Moreover, this was clarified in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., No. L-68375 dated April 15, 1998, where the Supreme Court ruled that "...since the Swiss Government does not impose any tax on the dividends to be received by the said corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed." ADcEST It appearing from the supporting documents that you submitted, i.e. , a letter addressed to, and duly confirmed by Mr. Marius Kohl, Head of the Tax Office of Luxembourg that BMSLUX, being the 100% beneficial owner of the BMSPI shares as further evidenced by the Declaration of Trust duly executed by Bristol-Myers Squibb Company (BMSC), is not subject to income tax on dividends received from foreign sources under the Luxembourg Tax Law, this Office hereby confirms that cash dividends that will be paid by BMSPI to BMSLUX, shall be subject to a 15% withholding tax pursuant to Section 28 (B)(5)(b) of the Tax Code of 1997, as amended. 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 the ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group