Fernandez Aguja Law Firm

November 27, 2009 BIR RULING [DA-(C-286) 708-09] 28 (B) (5) (b); BIR Ruling 208-89; DA 233-99; 179-04; 380-05; 296-06 Fernandez Aguja Law Firm Suite 5F JL Building Don Jose Avila cor. Don Gil Garcia Streets Cebu City Attention: Atty. Rita A.S. Fernandez Partner Gentlemen : This refers to your letter dated November 12, 2009 requesting, on behalf of your client, EBAR Abstracting Company, Inc. ("EBAR") confirmation that dividends payable by domestic corporations to a Company domiciled in Bermuda are subject to tax at the rate of 15% based on Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. It is represented that EBAR is a domestic corporation duly organized and registered under the laws of the Republic of the Philippines with principal place of business at Kingscourt Building II, Pasong Tamo Street, San Lorenzo, Makati City, Philippines; that EBAR is a duly registered taxpayer and is 100% owned by PABT Ltd., a non-resident foreign corporation organized and existing under the laws of Bermuda. It is also represented that PABT Ltd. is domiciled in Bermuda and enjoys a tax exempt status on dividends received pursuant to The Exempted Undertaking Tax Protection Act of 1966, as certified in the Tax Assurance Certificate issued by the Registrar of Companies for the Minister of Finance of Bermuda; and that it has no permanent establishment in the Philippines and is not duly registered as a corporation in the Philippines per Certificate of Non-registration of Corporation/Partnership issued by the Securities and Exchange Commission on October 19, 2009. It is further represented that EBAR will declare dividends to PABT Ltd. In reply, please be informed that Section 28 (B) (5) (b) of the Tax Code of 1997, provides, viz. : HScDIC "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%), which represents the difference between the regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax 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;" Under the said provision, if the country of domicile of the recipient corporation, in this case, Bermuda, allows as credit against the tax imposable by it an amount equivalent to seventeen percent (17%) [now 15%] of the dividends remitted to corporations domiciled therein, the dividends so remitted are subject to withholding tax at the rate of 15%. The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., 160 SCRA 573 [1988] has ruled that exemption from taxes by the country of domicile of the non-resident corporate stockholder on the dividends received is sufficient basis for the applicability of the 15% tax rate. Thus: "While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received by Glaxo from the Philippines should be considered as a full satisfaction of the given condition. For, as aptly stated by respondent court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369 amending Section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporation's interest here and discourage them from investing capital in our country." CHDAEc The ruling in the above case was reiterated in the case of Caltex (Philippines) Inc. v. Commissioner of Internal Revenue, CTA Case No. 4986 dated October 6, 1995, wherein it was held that the dividends remitted by a domestic corporation to a resident of Bermuda are subject to 15% withholding tax inasmuch as Bermuda does not impose any tax on dividends received by corporations domiciled therein, pursuant to The Exempted Undertaking Tax Protection Act of 1966. The BIR had also previously ruled that where the country of which the non-resident recipient of dividend does not impose any tax on dividends received from the domestic company, the dividends will be subject to final withholding tax at the rate of 15% (BIR Ruling No. 208-89 and DA-233-99) . In BIR Ruling No. DA-224-98 , the BIR ruled that a corporation which was incorporated under the laws of the British Virgin Islands is liable for tax equivalent to fifteen percent (15%) of the amount of dividend received based on Sec. 28 (B) (5) (b) of the Tax Code, as amended. In justifying the application of the tax rate of fifteen percent (15%), the BIR invoked its previous ruling in BIR Ruling No. 208-89 dated September 28, 1989 and held that: "Generally, under the above-quoted Section 24 (b) (5) (B) of the Tax Code, as amended, dividend paid to a non-resident foreign corporation is subject to withholding tax at the rate of 35%. However, if the country where the non-resident foreign corporation is domiciled allows a credit against the tax due from the non-resident corporation taxes deemed to have been paid in the Philippines in an amount equivalent to 20% of such dividend, or does not subject such dividend to taxation, then dividend paid to such non-resident foreign corporation are taxed only at the rate of 15%. Thus, since The International Business Companies Ordinance of the Territory of the British Virgin Islands . . . does not impose any tax on dividend received from foreign sources, which logically would include those received from Philippine corporations by foreign corporations domiciled therein, then said cash dividend . . . is subject only to the preferential withholding tax rate of 15% imposed under then Section 25 (b) (5) (B) of the Tax Code, as amended (now Section 28 (B) (5) (b) of the Tax Code of 1997)." Based on the foregoing, considering that Bermuda does not impose tax on dividends received by corporations domiciled therein pursuant to The Exempted Undertaking Tax Protection Act of 1966, this Office hereby confirms your opinion that dividends to be paid by EBAR, a domestic corporation, to PABT Ltd., a non-resident foreign corporation domiciled in Bermuda, are subject to the 15% preferential withholding tax rate under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. cDIHES 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service