BIR Ruling [DA-480-06]

August 8, 2006 BIR RULING [DA-480-06] DA 290-05 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Ms. Maria Victoria C. Espao Tax Partner Gentlemen : This refers to your letter dated June 6, 2006 stating that your client, KSP Manufacturing, Inc. (KSP) is a corporation organized and existing under the laws of the Philippines with business address at Vital Industries Properties, Barangay Langkaan, Dasmarias, Cavite; that it is registered with the Philippine Economic Zone Authority (PEZA) as an export enterprise engaging in the manufacture of cell phone cases, head phones and other related goods; that it is currently operating at First Cavite Industrial Estate (FCIE), Dasmarias, Cavite; that over the years of its operations, KSP has registered positive sales and earnings growth and, thus, has accumulated retained earnings; that it is now planning to declare cash dividends to its stockholders; that on the other hand, Mr. Michiyuki Kobayashi, a Japanese citizen, is one of the incorporators of KSP; that he presently owns 99.9% of the shares of stock of KSP and serves as its President; and that Mr. Kobayashi has also been filing individual tax returns as resident alien without being questioned by the BIR, paying community tax regularly, and has an employment contract with KSP. In connection therewith, you now request confirmation of your opinion that Mr. Kobayashi is a resident alien for Philippine income tax purposes. Thus, any dividends that he would receive from KSP shall be subject to 10% final income tax pursuant to Section 24(B)(2) of the Tax Code of 1997. In reply thereto, please be informed that Section 22(F) of the Tax Code of 1997 defines the term "resident alien" as an individual whose residence is within the Philippines and who is not a citizen thereof. Conversely, Section 5 of Regulations No. 2, otherwise known as the Income Tax Regulations defines a "non-resident alien individual" as an individual (a) Whose residence is not within the Philippines; and (b) Who is not a citizen of the Philippines. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. A careful scrutiny of the above-cited laws disclosed that Mr. Kobayashi is considered a resident alien for purposes of his income tax liability in the Philippines as he has passed the requisites for a resident alien. As represented, he has been involved with the Company since he presently owns 99.9% of the shares of stock of KSP and has served as its President. Moreover, being the President of the Company he is required to be in the Philippines most of the time since he manages the day-to-day operations. Thus, in CTA Cases Nos. 2952 and 3161 per decisions dated August 30, 1982 and March 21, 1982 , respectively, it was held that when an alien has consistently filed his income tax returns for several years, as a resident alien, and these tax returns have never been questioned by the Bureau of Internal Revenue, it is tantamount that the BIR has treated or accepted that a taxpayer is indeed a resident alien. DHaEAS Considering that the above-cited cases are in all fours similar to Mr. Kobayashi, this Office holds that he is deemed a resident alien for Philippine income tax purposes. On the other hand, Section 24(B)(2) of the Tax Code of 1997 provides that "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: "xxx xxx xxx "Ten percent (10%) beginning January 1, 2000. "xxx xxx xxx" Since Mr. Kobayashi is a resident alien, his dividend income will be subject to the 10% final tax as prescribed in Section 24(B)(2) of the Tax Code of 1997. Consequently, KSP, as a withholding agent, shall be liable to withhold the 10% final tax on such income tax pursuant to Revenue Regulations No. 2-98. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service