BIR Ruling [DA-567-06]

September 20, 2006 BIR RULING [DA-567-06] 28 (B) (5) (b); DA-149-2004 Lopez & Co . LAC Center 2528 Leiva Street Sta. Ana, Manila Attention: Mr. Restituto T. Lopez Senior Partner Gentlemen : This refers to your letter dated July 10, 2006 requesting for a ruling on the applicable final withholding tax rates relative to the cash dividends declared and/or will be declared by Technopaq, Inc. to Power Best Properties, Ltd., a Hongkong based company. It is represented that Technopaq, Inc., a wholly owned subsidiary of Power Best Properties, Ltd. was incorporated on April 11, 1997 under Philippine Laws primarily to buy, sell, distribute and market, at wholesale, all kinds of goods, commodities, wares and merchandise; that its registered office is at 2/F Astron Building, 102E E. Rodriguez Jr. Ave., Bo. Ugong, Pasig City; that Power Best Properties, Ltd. is a company incorporated in Hongkong and having its registered office at Unit C, 6/F, Block 4, Bamboo Mansions, Site 12 Whampao Garden, 3 Tak Hong Street, Hunghom, Kowloon, Hongkong; that in a special meeting on July 10, 2006, the Board of Directors of Technopaq, Inc. unanimously approved and adopted the following resolutions, viz: "RESOLVED, that a cash dividend be and the same is hereby declared out of corporation's unrestricted retained earnings in favor of its stockholders of record as of July 3, 2006, as follows: Name of Stockholder Amount of Cash Dividend Power Best Properties Ltd. P7,351,270.04 Joseph Joseph Polayilthckkedom 100.00 Gurmukh Singh Thakral 100.00 Karan Singh Thakral 100.00 Balwant Singh Kumar 100.00 Gursharan Kaur Kumar 100.00 P7,351,770.04 =========== RESOLVED FURTHER, That the said cash dividend be distributed pro indiviso to the corporation's stockholders of record as of said date in proportion to their respective shareholdings as of that date." HAISEa that Technopaq, Inc. had unrestricted retained earnings of P7,351,770.04 as of June 30, 2006; that on July 3, 2006, the following were the stockholders of record of the said. corporation with their respective subscriptions/shareholdings as follows: Name of Stockholder Amount Power Best Properties Ltd. P42,647,229.96 Joseph Joseph Polayilthckkedom 300.00 Gurmukh Singh Thakral 300.00 Karan Singh Thakral 300.00 Balwant Singh Kumar 300.00 Gursharan Kaur Kumar 300.00 P42,648,729.96 ============ that cash dividends that were declared and/or will be declared by Technopaq, Inc. and payable to Power Best Properties Ltd. are subject to 15% withholding tax pursuant to Section 28(B)(5)(b) of the Tax Code of 1997; and that cash dividends to be received by Hongkong based companies from Philippine companies are exempt from Hongkong Tax and/or are not subject to Hongkong Profits Tax. In reply, please be informed that Section 28(B)(5)(b) of the Tax Code of 1997, as amended provides, viz: "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 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, and thirty-three (33%) in 1999, and thirty-two percent (32%) thereafter on corporations (now 35% pursuant to Republic Act No. 9337) and the fifteen percent (15%) tax on dividends as provided in this subparagraph." Based on the above provision, dividends declared by a domestic corporation in favor of a nonresident foreign corporation domiciled in a country that allows a credit of 17% (after the year 1999) on such dividends are subject to the withholding tax rate of 15%. Several rulings of this Office consistently held that the same 15% rate applies even more if the country of the recipient non-resident foreign corporation exempts from tax the dividends declared by the domestic corporation. (BIR Ruling dated February 23, 1978; BIR Ruling Nos. 208-89 dated September 28, 1989; DA-287-7-1-98 and DA-224-98). Moreover, this was clarified in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc ., G.R. No. L-68375 dated April 15, 1998, where the Supreme Court ruled that ". . . since the Swiss Government does not impose any tax on the dividends to be received by the said corporation in the Philippines, the condition imposed under the abovementioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed." It appearing from the supporting documents that you submitted, i.e., a photocopy of the book Asia Pacific Taxation, 1995 Edition, KPMG International Tax Services, p. 89, stating that dividends (both foreign and Hong Kong source) are not subject to Profits Tax and a letter-confirmation from UHY Tai Kong CPA Limited, 21/F China-Chem Tower, Connaught Road, Central Hong Kong, that the HK Inland Revenue Department treats all dividends as non-taxable and that Hong Kong Profits Tax rates for year of assessment 2005/06 are 17.5% (for corporations) and 16% (for unincorporated businesses), the dividends declared and/or will be declared by Technopaq, Inc. to Power Best Properties, Inc. are not subject to income tax on dividends received from foreign sources under the Hong Kong Laws, this Office hereby confirms that cash dividends that will be paid by Technopaq, Inc. to Power Best Properties, Inc., shall be subject to a 15% withholding tax pursuant to Section 28(B)(5)(b) of the Tax Code of 1997, as amended. TaDAHE 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