BIR Ruling [DA-296-06]

May 3, 2006 BIR RULING [DA-296-06] Section 28 (B) (5) (b) Salvador Guevara & Associates Rms. 815-816, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue 1226 Makati City, Philippines Attention: Atty . Edmundo P . Guevara Gentlemen : This refers to your letter dated February 6, 2006, jointly signed with Atty. Maria Rosario L. Bernardo and Atty. Marie Tanya Z. Recalde requesting on behalf of your client, Symmetrix Capital Global Limited ("Symmetrix"), for confirmation of your opinion that cash and/or property dividends received by Symmetrix, a nonresident foreign corporation duly organized and domiciled in the Commonwealth of the Bahamas (the "Bahamas"), from a Philippine domestic corporation, including among others, China Banking Corporation ("China Bank"), a Philippine domestic corporation whose shares of stock are traded and listed in the Philippine Stock Exchange ("PSE"), are subject to the 15% preferential withholding tax rate under Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 (the "Tax Code of 1997"), as amended by Republic Act (RA) No. 9337. CAHTIS As represented, Symmetrix is a nonresident foreign corporation incorporated and domiciled in the Bahamas as an International Business Company (IBC) pursuant to the International Business Companies Act 2000. Symmetrix is neither registered nor doing business in the Philippines. China Bank, on the other hand, is a domestic corporation duly organized and existing under Philippine laws, whose shares of stock are listed and traded in the PSE. At present, Symmetrix owns 1,230,112 common shares of China Bank. As a shareholder, Symmetrix has received and expects to receive in the future dividends from China Bank. Under the laws of the Bahamas, all dividends received by a Bahamian IBC from foreign sources are exempt from tax in the Bahamas. In reply, please be informed that prior to its amendment by R.A. No. 9337, Section 28(B)(5)(b) of the Tax Code of 1997 provided, 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. 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 subparagraph;" Under the above provision, if the country of domicile of the recipient corporation, in this case, Bahamas, 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 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 . (A) . . . (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;' xxx xxx xxx" 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%. The Supreme Court, in the case 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 dividends received, 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." The ruling in the Wander Philippines case was reiterated in the case of Caltex (Philippines), Inc. vs. Commissioner of Internal Revenue , CTA Case No. 4986 dated October 6, 1995, wherein it was 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. The BIR had also previously ruled that where the country of which the nonresident 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 Section 28(B)(5)(b) of the Tax Code of 1997, 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 non-resident 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)." Hence, whether the tax sparing credit is 17%, 20% or 15%, dividends received from a Philippine corporation by a corporation incorporated in and domiciled in the Bahamas are subject to the preferential tax rate of 15%. In other words, the amendment by RA 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 Bahamian IBC, such as Symmetrix, to avail of the preferential rate of 15% withholding tax on dividends considering that the Bahamas does not impose tax on dividends received by a Bahamian IBC from foreign sources. STECAc In view of the foregoing, this Office confirms your opinion that cash and/or property dividends received by Symmetrix from a Philippine domestic corporation, including among others, China Bank are subject to the 15% preferential withholding tax rate under Section 28(B)(5)(b) of the Tax Code of 1997, as amended by RA 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service