Braimer International Ltd.

December 22, 2009 BIR RULING [DA-(C-339) 821-09] Section 28 (B) (5) (b); BIR Ruling No. 208-89 dtd. 9/28/89; DA-233-99; DA-145-07 dtd. 3/8/07; DA-296-06 dtd. 10/3/06 Braimer International Ltd. c/o Third Millenium Oil Mills, Inc. Room 403, CSP Building 815 Quezon Avenue Quezon City Attention: Mr. Ernesto P. Dyangko Philippine Agent Gentlemen : This refers to your letter dated September 4, 2008 requesting for the confirmation of your opinion that the cash and/or property dividends received by Braimer International Ltd. ("Braimer"), a non-resident foreign corporation incorporated and domiciled in the Cook Islands, from Philippine domestic corporations, are subject to the 15% preferential final withholding tax (FWT) rate under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997 (the "Tax Code of 1997"), as amended by Republic Act (RA) No. 9337. EAHcCT As represented, Braimer is a non-resident foreign corporation incorporated and domiciled in the Cook Islands as an International Company pursuant to the Cook Islands International Companies Act of 1981-1982; that it is neither registered nor doing business in the Philippines; that it owns shares of stock in Third Millenium Oil Mills, Inc. (TMOMI) and Specialty Pulp Manufacturing Inc. (SPMI); that both TMOMI and SPMI are corporations organized and existing under the laws of the Philippines; that as shareholder, Braimer is entitled to receive dividends from said Philippine domestic corporations; and that Braimer is not subject to Cook Islands taxes pursuant to Section 249 (2) (a) of the Cook Islands International Companies Act of 1981-1982. In reply, please be informed that Section 2 of R.A. No. 9337 reads as follows: "Sec. 28. Rates of Income Tax on Foreign Corporation. 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 then 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; xxx xxx xxx" Correspondingly, the required tax sparing credit was increased from 17% to 20% starting November 1, 2005 until the end of year 2008, after which the tax sparing credit shall be 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 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." DHITSc The ruling in the Wander Philippines case was reiterated in the case of Caltex (Philippines), Inc. vs. 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 is 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 nonresident 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 subject to fifteen percent (15%) of the amount of dividend received based on Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. In justifying 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)." In view of the foregoing, this Office confirms your opinion that cash and/or property dividends received by Braimer from a Philippine domestic corporation, are subject to the 15% preferential withholding tax rate under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended by RA No. 9337. AECacT Accordingly, since Braimer is exempt from Cook Islands taxes under the Cook Islands International Companies Act of 1981-1982, the fifteen percent (15%) preferential FWT rate on cash or property dividends paid to Braimer from Philippine domestic corporations are subject only to the preferential withholding tax rate of 15% imposed under then Section 28 (B) (5) (b) of the Tax Code of 1997. 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