BIR Ruling [DA-179-04]

April 6, 2004 BIR RULING [DA-179-04] 28 (B) (5) (b); DA-233-99 SGV & Co. 6760 Ayala Ave. Makati City Attention: Mr. Joel L. Tan-Torres Partner, Tax Division Gentlemen : This refers to your letter dated November 20, 2003 requesting for a confirmation of your opinion that dividends payable to your client, International Water (MWC) S.a.r.l ("IWL"), by domestic corporations are subject to tax at the rate of 15%. It is represented that IWL is a non-resident foreign corporation organized and existing under the laws of Luxembourg; that it owns shares of stock in Manila Water Company, Inc. ("MWCI") and MWC Holdings, Inc ("MWCHI") both of which are domestic corporations; and that in support of your request, you submitted the following: (1) Articles of Incorporation of IWL; (2) SEC Certification of Non-registration of Corporation/Partnership; (3) Special Power of Attorney in favor of SGV and Co.; and (4) Certification from the Luxembourg Tax Authority that the dividends received by IWL from MWCI and MWCHI are exempt from Luxembourg tax. In reply, please be informed that under Section 28 (B)(5)(b) of the Tax Code of 1997, which provides, viz : "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. "(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 subparagraph;" Under the said provision, if the country of domicile of the recipient corporation, in this case, Luxembourg, allows as credit against the tax imposable by it an amount equivalent to seventeen percent (17%) of the dividends remitted to corporations domiciled therein, the dividends so remitted are subject to a withholding tax at the rate of 15%. Based on the Certification from the Tax Authorities of Luxembourg, under the Luxembourg Tax Laws, dividends received by IWL from its shareholdings in MWC and MWCHI are exempt from Luxembourg corporate income tax pursuant to Article 166 of the Impt sur le Revenu . The Supreme Court, in the cash of Commissioner of Internal Revenue vs. Wander Philippines, Inc., 160 SCRA 573 [1988] has ruled that exemption from taxes by the country of domicile of the non-resident corporate stockholder on the dividends receive, is sufficient basis for the applicability of the 15% tax rate. Thus: "While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received by Glaxo from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369 amending Section 24 (b)(1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporation's interest here and discourage them from investing capital in our country." In another case, Caltex (Philippines) Inc. v. Commissioner of Internal Revenue (CTA Case No. 4986 dated October 6, 1995) the ruling in the Wander Philippines case was reiterated and held that the dividends remitted by a domestic corporation to a resident of Bermuda is subject to 15% withholding tax inasmuch as Bermuda does not impose any tax on dividends received by corporations domiciled therein, pursuant to The Exempted Undertaking Tax Protection Act of 1966. DcTaEH The BIR had also previously ruled that where the country of which the non-resident recipient of dividend does not impose any tax on dividends received from the domestic company, the dividends will be subject to final withholding tax at the rate of 15% ( BIR Ruling No. 208-89 and DA-233-99 ). In BIR Ruling No. DA-224-98 , the BIR ruled that a corporation which was incorporated under the laws of the British Virgin Islands is subject to fifteen percent (15%) of the amount of dividend received based on Sec. 28 (B)(5)(b) of the Tax Code, as amended. In justifying the tax rate of fifteen percent (15%), the BIR invoked its previous ruling in BIR Ruling No. 208-89 dated September 28, 1989 and held that: "Generally, under the above-quoted Section 24(b)(5)(B) of the Tax Code, as amended, dividend paid to a non-resident foreign corporation is subject to withholding tax at the rate of 35%. However, if the country where the nonresident foreign corporation is domiciled allows a credit against the tax due from the non-resident corporation taxes deemed to have been paid in the Philippines in an amount equivalent to 20% of such dividend, or does not subject such dividend to taxation, then dividend paid to such non-resident foreign corporation are taxed only at the rate of 15%. "Thus, since The International Business Companies Ordinance of the Territory of the British Virgin Islands . . . does not impose any tax on dividend received from foreign sources, which logically would include those received from Philippine corporations by foreign corporations domiciled therein, then said cash dividend . . . is subject only to the preferential withholding tax rate of 15% imposed under then Section 25(b)(5)(B) of the Tax Code, as amended (now Section 28(B)(5)(b) of the Tax Code of 1997)." Accordingly, your opinion that the dividends paid by MWC and MWCHI to IWL are subject to the final withholding tax rate of 15% pursuant to Section 28 (B)(5)(b) of the Tax Code of 1997 is hereby confirmed. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group