BIR Ruling [DA-417-05]

October 7, 2005 BIR RULING [DA-417-05] Section 28 (B) (5); DA-142-01 SGV & Co . 6760 Ayala Avenue 1226 Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated September 27, 2005, requesting confirmation of your opinion that the cash dividends to be declared in favor of Texas Instruments (Philippines), Incorporated (TI) from TI (Philippines), Inc. are subject to a preferential tax rate of 15%, pursuant to Section 28 (B)(5)(b) of the Tax Code of 1997, as amended. It is represented that TI (Philippines), Inc. is a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, with its registered office and its principal place of business at PEZA, Loakan Road, Baguio City, Philippines; that Texas Instruments (Philippines) Inc. (hereinafter referred to as TI) is a company organized and existing under the laws of the State of Delaware in the United States with principal business address at 12500 TI Boulevard, Dallas, Texas 75243; that it is licensed to engage in business under Philippine laws through its Philippine branch office; that TI owns shares of stock in TI (Philippines) Inc. equivalent to 99.99% of the latter's outstanding and subscribed capital stock; that these investments were made by TI on its own, independently of its Philippine branch office; that TI (Philippines) Inc. intends to declare cash dividends in favor of its sole corporate stockholder, TI, within this month. In reply, please be informed that Section 28(B)(5)(b) of the 1997 Tax Code, as amended, provides: "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 paragraph; xxx xxx xxx." Based on the foregoing, the regular income tax of thirty-two percent (32%) applicable to dividend remittances to nonresident foreign corporate stockholders of a Philippine corporation is reduced to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA shall allow tax credit in favor of TI for "taxes deemed paid in the Philippines" against its US taxes. In the case of Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corp. (P&G) and Court of Tax Appeals , G.R. No. 66838, December 2, 1991, the Supreme Court in ruling that the USA domiciled stockholder of P&G is entitled to the preferential fifteen percent (15%) dividend tax rate further declared that the NIRC, as amended, does not in fact require that the "deemed paid" tax credit shall have actually been granted but merely that the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for "taxes deemed paid in the Philippines" as applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. IHCDAS Following the said case, this Office has ruled in BIR Ruling No. 105-92 dated March 30, 1992 and BIR Ruling No. DA-142-01 dated August 30, 2001, that dividends payable by a Philippine company to its U.S. parent company are subject to a 15% withholding tax. In the said ruling, this Office recognized that U.S. tax laws allow a credit against the tax due from the U.S. taxes deemed to have been paid in the Philippines equivalent to at least 20%. Such being the case, your opinion that the dividends to be remitted by TI (Philippines), Inc. to TI are subject to the preferential tax rate of fifteen percent (15%) pursuant to Section 28(B)(5)(b) of the Tax Code of 1997, as amended, 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, (SGD.) JOSE MARIO C. BUAG OIC, Commissioner of Internal Revenue