BIR Ruling [DA-380-05]

September 6, 2005 BIR RULING [DA-380-05] Section 28 (B) (5) (b); BIR Ruling No. DA-179-04 Salvador Guevara & Associates Rms. 815-816, Tower One & Exchange Plaza Ayala Triangle, Ayala Avenue Makati City Attention: Atty . Edmundo P . Guevara Gentlemen : This refers to your letter dated July 11, 2005 jointly signed with Atty. Maria Rosario L. Bernardo and Atty. Marie Tanya L. Zurbito requesting on behalf of your client, Columbus Atlantic Fund Limited (Columbus) for confirmation of your opinion that cash and/or property dividends received by Columbus, a nonresident foreign corporation duly organized and domiciled in the Commonwealth of the Bahamas (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 Sec. 28(B)(5)(b) of the Tax Code of 1997, as amended. As represented, Columbus 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. Columbus 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, Columbus owns 1,230,112 common shares of China Bank. As shareholder, Columbus 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 fact, the Manager of the Bank Supervision Department of the Central Bank of the Bahamas certified that under the Tax Laws of Bahamas, the Bahamas does not impose taxes on dividends received by a Bahamian IBC; neither does it impose taxes on income in general. In reply, please be informed that Section 28(B)(5)(b) of the Tax Code of 1997, 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 . 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 said 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 seventeen percent (17%) of the dividends remitted to corporations domiciled therein, the dividends so remitted are subject to withholding tax at the rate of 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 the 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. v. 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. cDHAES 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 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)." In view of the foregoing, this Office confirms your opinion that cash and/or property dividends received by Columbus 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. 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 as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue