15% Withholding Tax Remitted Abroad

July 19, 1976 BIR RULING NO. 004-76 15% Withholding tax remitted abroad . This refers to your letter dated September 30, 1975 requesting for the reconsideration of BIR Ruling No. 75-005, dated September 10, 1975, wherein it was held that dividends to be remitted by your client, Colgate Palmolive Philippines, Inc. to Colgate-Palmolive Company, U.S.A., which owns 100% of your client, is subject to the 35% withholding tax in accordance with Section 24(b) of the Code, as amended by Presidential Decree No. 369. cdt Under Section 24(b) of the Tax Code, as amended by Presidential Decree No. 369, the domestic corporation is subject to the 15% withholding tax "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 Philippine equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this section . . ." In other words, only 15% tax shall be imposed on such dividends provided that the country where the non-resident foreign corporation is domiciled credits the taxes "deemed" to have been paid in the Philippines against the tax due from the recipient corporation, which should be equivalent to at least 20% of the dividends remitted to said corporation. (See Sec. 17(b), Revenue Regulations No. 2, as amended by Revenue Regulation No. 8-75. In the ruling under consideration, this Office cited the case of the American Chicle Co. v. United States (94 Ct Cl 699 41 F. Supp. 537 affirmed by the U.S. Supreme Court in 316 U.S. 450, 86 L Ed 1591), which involved an issue as to the proper method of computing the credit which an American corporation may claim against the U.S. income tax, if dividends were received from a foreign subsidiary which has paid income tax to a foreign government upon such income, a part of which has come to the American corporation as dividends. The said American Chicle Case involved an American corporation which has a wholly owned subsidiary in Canada. The subsidiary has taxable income in Canada of $100,000 and was taxed on said income at the rate of 20%. In said case, it was ruled that the U.S. corporation is entitled to credit, not for the entire amount of $20,000 as Canadian tax paid by the subsidiary, but only for $16,000 which represents that portion of the tax paid by the subsidiary on the amount of dividends actually remitted to the former. Noting that only $16,000.00 was credited against U.S. tax, and noting further that the rule in said case applies to dividends from subsidiaries in less developed countries, this Office ruled that "Considering that the Philippines is a less developed country, the foregoing method of computation applies in your case. Accordingly, using the same figures, except the 15% rate of withholding tax provided under Philippine law, it is clear that $15,000 represents the 15% withholding tax payable by you, leaving only $85,000 which is to be remitted to your parent corporation. Such being the case, the U.S. Government will allow only a credit in the amount of $12,750 (15% of $85,000) in favor of your parent corporation, which is less than the amount of $20,000 representing the 20% difference between the regular tax of 35% and the reduced tax of 15% on dividends. " However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income tax paid by the corporation declaring the dividends in addition to the tax withheld from the dividend remitted . In other words, the U.S. government will allow as credit to the U.S. corporation or recipient of the dividends, in addition to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend to the U.S. corporation and 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount P30,000 composed of: (1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows: P75,000 X P25,000 = P18,750 100,000 (2) The amount of 15% of P75,000 withheld = 11,250 P30,000 The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S. corporation from a Philippine subsidiary is clearly more than the 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00, the dividends to be remitted under the above example, amounts to P15,000.00 only. In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that the dividends to be remitted by your client to its parent company shall the subject to the withholding tax at the rate of 15% only. This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax Code, which are the basis of the ruling, are not revoked, amended and modified, the effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to a U.S. corporation. cdt