KPMG

November 20, 2009 BIR RULING [DA-(C-273) 687-09] Sec. 28 (B) (5) (b); DA-(C-114) 372-08 KPMG Manabat Sanagustin & Co., The KPMG Center, 9F 6787 Ayala Avenue, Makati City Attention: Atty. Herminigildo G. Murakami Principal, Tax & Corporate Services Atty. Andrew James Gerard D. Ruiz Senior Manager, Tax & Corporate Services Gentlemen : This refers to your letter dated October 14, 2009 requesting on behalf of your client, J.P. Morgan Securities Philippines, Inc., (JP Morgan Securities) , for a confirmation of your opinion that the dividends to be paid by JP Morgan Securities to its parent company, J.P. Morgan International Finance Limited (JP Morgan International) are subject to the fifteen percent (15%) final withholding tax under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. It is represented that JP Morgan Securities is a corporation duly incorporated and existing under Philippine law with business address at 31st Floor, PhilamLife Tower, 8767 Paseo de Roxas, Makati City, 1226; that it is a wholly-owned subsidiary of JP Morgan International, a company organized under and existing under the laws of the State of Delaware, U.S.A., with business address at 500 Stanton Christiana Road, Newark, U.S.A.; that JP Morgan International is not licensed to do business in the Philippines and it does not have a permanent establishment or a fixed place of business in the Philippines in which its business is wholly or partly carried on; that JP Morgan Securities will declare and pay to its parent JP Morgan International cash dividends out of its unappropriated retained earnings as of December 31, 2008. In reply, please be informed Section 28 (B) (5) (b) of the Tax Code, as amended by Republic Act (R.A.) No. 9337, provides that "(B) Tax on Nonresident Foreign Corporation. "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. cDHAES "(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 non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%), on dividends as provided in this subparagraph: Provided, That effective January 1, 2009, the credit against the tax due shall be equivalent to fifteen percent (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends." In applying the aforesaid Section, this Office in BIR Ruling No. DA-140-07 dated March 7, 2007 ruled that "The Supreme Court En Banc, in the Case of Commissioner of Internal Revenue vs. Procter and Gamble Philippines Manufacturing Corporation , G.R. No. 66838 dated December 2, 1991, has ruled that Sections 901 and 902 of the U.S. Internal Revenue Code meets the deemed tax paid requirement provided under then Sections 25 (b) (5) (B) of the Tax Code of 1993, which is now Section 28 (B) (5) (b) of the Tax Code, as amended; consequently, a sufficient basis for the applicability of the 15% final withholding tax rate thus: "It is important to note that Section 24(b)(1), NIRC, does not require that the U.S. must be a 'deemed paid' tax credit for the dividend tax (20% points) waived by the Philippines in making applicable the preferred dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the U.S. tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the U.S. 'shall allow' P&G-USA a 'deemed paid' tax credit in the amount equivalent to the twenty (20) percentage points waived by the Philippines. xxx xxx xxx "It is also useful to note that both (i) the tax credit for the Philippines dividend tax actually withheld, and (ii) the tax credit for the Philippines corporate income tax actually paid by P&G Phil. but 'deemed paid' by P&G-USA, are credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed because of the U.S. congressional desire to avoid or reduce double taxation of the same income stream." CTSAaH xxx xxx xxx "Corollarily, this Office had already ruled on the matter when it said in BIR Ruling No. 080-92 that ". . . considering that under the present provisions of the U.S. Federal Tax Code, the amount of tax deemed paid on such dividends, and accordingly, to be credited against U.S. tax on said dividends, meets the 20% requirement of Section 25(b)(5)(B) of the Tax Code, as amended, dividends which Avon Cosmetics, Inc. will remit to Avon Products, Inc. domiciled in the U.S. are subject to withholding tax at the rate of 15% only which is within the maximum ceiling of the 20% tax of the gross amount of the dividends as provided in Article 11(2)(b) of the RP-US Tax Treaty." (see En Banc Resolution of the Supreme Court dated December 2, 1991 in Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corporation , G.R. No. 66838) Furthermore, this Office had previously confirmed that a corporation which was incorporated under the laws of the United States is subject to 15% of the amount of dividend received based on the tax sparing provision of the Tax Code of 1997, as amended. (BIR Ruling Nos. DA-021-07 dated January 17, 2007 and 275-88 dated June 28, 1988) In view of the foregoing, this Office hereby confirms your opinion that dividends to be declared by JP Morgan Securities to JP Morgan International shall be subject to the preferential withholding tax rate of 15% pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended by R.A. No. 9337. 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