BIR Ruling [DA-404-03]

November 10, 2003 BIR RULING [DA-404-03] Sec. 28 (B) (5) (b) DA-224-98 Ponce Enrile Reyes & Manalastas 3/F, Vernida IV Building, 128 Leviste Street Salcedo Village, Makati City Attention: Attys . Emelyn W . Corpus-Martinez Winthrop H . R . Baez & Welson T . Chu Gentlemen : This refers to your letters dated March 11 and August 13, 2003 requesting for a ruling that dividends received from Pancake House, Inc. ("PHI"), a domestic corporation with shares registered and listed in the Philippine Stock Exchange, by Kingbay Enterprises Limited ("KEL"), a non-resident corporate stockholder organized under the laws of the British Virgin Islands, shall be subject to the fifteen percent (15%) preferential tax rate on dividends, in accordance with Section 28(B)(5)(b) of the Tax Code of 1997. It is represented that KEL is a non-resident foreign corporation incorporated under The International Business Companies Act (CAP. 291) No. 8 of 1984 of the Territory of the British Virgin Islands; that it has subscribed to One Million Six Hundred Thousand Two Hundred Ninety-Four (1,600,294) shares of the authorized capital stock of PHI; that recently, PHI declared cash dividends to be distributed to its stockholders of record; that under the above-mentioned Act, all dividend payments to non-residents of the British Virgin Islands by a company incorporated under it are exempt from income tax; that Section 111(1) of the said Act provides that "PART XI "INCOME TAXES, STAMP DUTIES AND REGISTRATION OF DOCUMENTS "Exemption from tax, etc. 111.(1) Notwithstanding any provision of the Income Tax Act, "(a) a company incorporated under this Act; "(b) all dividends, interest, rents, royalties, compensations and other amounts paid by the company to persons who are not persons resident in the British Virgin Islands; and "(c) capital gains realized with respect to any shares, debt obligations or other securities of a company incorporated under this Act by persons who are not persons resident in the British Virgin Islands, "are exempt from all provisions of the Income Tax Act." and that in support of your request you submitted a copy of the Memorandum of Association of KEL and the pertinent portion [Part XI, III (1)] of the British Virgin Islands International Business Companies Act (CAP. 291) No. 8 of 1984. In reply, please be informed that Section 28(B)(5)(b) of the Tax Code of 1997 provides as follows: "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporations . 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;" AaIDHS Generally, under the above-quoted Section 28(B)(5)(b) of the Tax Code of 1997, dividends paid to a nonresident foreign corporation, beginning in the year 2000 and thereafter, is subject to withholding tax at the rate of 32%. However, if the country where the nonresident foreign corporation is domiciled allows a credit against the tax due from the nonresident corporation taxes deemed to have been paid in the Philippines in an amount equivalent to 17% of such dividends, or does not subject such dividends to taxation, then dividends paid to such nonresident foreign corporation are taxed only at the rate of 15%. Thus, since The International Business Companies Act of the Territory of the British Virgin Islands under which KEL was incorporated does not impose any tax on dividends receive from foreign sources, which logically would include those received from Philippine corporations by foreign corporations domiciled therein, then said cash dividends received by KEL and other stockholders similarly situated from PHI is subject only to the preferential withholding tax rate of 15% imposed under Section 28(B)(5)(b) of the Tax Code of 1997. ( BIR Ruling No. 224-98 dated June 9, 1998 citing BIR Ruling No. 208-89 dated September 28, 1989 ) 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