BIR Ruling [DA-188-01]

October 17, 2001 BIR RULING [DA-188-01] S.24 (B) (2); S.73 (C); 203-99 Campos, Campos & Singson Certified Public Accountants Room 406, Campos-Rueda Building 101 Urban Avenue, Makati City Attention: Mr . Tereso A. Campos, Jr . Partner Gentlemen : This refers to your letter requesting for a ruling as to whether or not your client, AdPhoto, Inc., a domestic corporation engaged in the business of commercial photography, is entitled to a refund of withholding tax on cash dividend declared from the Company's retained earnings as of December 31, 1997 in favor of its individual shareholders which were withheld and remitted to the Bureau of Internal Revenue as follows: W/holding tax paid Retained earnings as of December 31, 1997 P9,689,520.00 Cash dividend declared in 1998 (2,245,800.00) P134,748.00 1999 (4,000,000.00) 320.000.00 2000 (1,500,000.00) 150,000.00 Balance (P1,943,720.00 P604,748.00 =========== ========= In reply thereto, please be informed that Section 24(B)(2) of the 1997 Tax Code specifically states that: "SEC. 24. Income Tax Rates . xxx xxx xxx (B) Rate of Tax on Certain Passive Income : xxx xxx xxx (2) Cash and/or Property Dividends . A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; Ten percent (10%) beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax." (Emphasis supplied.) Moreover, Section 73(C) thereof provides that: "SEC. 73. Distribution of Dividends or Assets by Corporations . xxx xxx xxx (C) Dividends Distributed are Deemed Made from Most Recently Accumulated Profits . Any distribution made to the shareholders or members of a corporation shall be deemed to have been made from the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in with received." To reconcile the two aforecited provisions, this Office opined in BIR Ruling No. 203-99 dated December 16, 1999 that is a corporation had accumulated profits as of December 31, 1997, its distribution of dividends beginning 1998 and thereafter must come from accumulated profits as of December 31, 1997. After full distributions thereof. Section 73(C) of the 1997 Tax Code apply. Hence, for the prior year's accumulated profits, the rule shall be the "first in-first out" system. It necessarily follows that Section 73(C) shall not yet apply. Thereafter, the "last in-first out" system shall be used. Accordingly, cash and property dividends declared and distributed by domestic corporations to individual stockholders who are residents of the Philippines on or after January 1, 1998, but forming part of retained earnings as of December 31, 1997 as shown by a Board Resolution stating that said dividends as such and as established by the corporation's books of account shall not subject to income tax pursuant to Section 24(B)(2) of the 1997 Tax Code. Let it be clarified, however, that it is not AdPhoto that should file for a refund of the withholding tax on the cash dividends but rather the stockholders concerned. AdPhoto, being the withholding agent, has no legal personality to claim for a refund unless the individual stockholder entitled thereto executes a Special Power of Attorney in favor of AdPhoto to file the said claim. Moreover, any claim for refund should be filed with the Revenue District Office that has jurisdiction over the stockholders in accordance with the Memorandum dated August 15, 2001 issued by the Commissioner of the Internal Revenue. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Internal Group