Clarification of Rate of Tax to be Withheld from Dividends to be Remitted to Parent Company

September 10, 1975 BIR RULING NO. 005-75 Clarification of rate of tax to be withheld from dividends to be remitted to parent company (Sect. 24(b) of Tax Code, as amended by P.D. No. 369 .) This refers to your letter dated September 2, 1974 requesting dividends you will remit to your parent company, U.S.A. in accordance with Section 24(b) of the Tax Code, information on the rate of tax that should be withheld from the Jay Kay Ell, as amended by Presidential Decree No. 369. It appears that you are 100% owned by your parent company. cd 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 Philippines 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, to be subject to the tax on 15%, it must be shown that the United States in which your parent company is domiciled, grants paid in the Philippines equivalent to 20%. The pertinent provisions of the U.S. Internal Revenue Code provides: "Sec. 902 [1954 Code.]. (a) Treatment of Taxes Paid by Foreign Corporation . For purposes of this subpart, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall "xxx xxx xxx "(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits (as defined in subsection (c)(1)(B) of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits. cdta "xxx xxx xxx The foregoing provision is similar to Section 13(f) of the Revenue Act of 1936, the pertinent portion of which is quoted in the case of the American Chicle Co. v. United States, 94 Ct Cl 699 41F. Supp. 537 (affirmed by the U.S. Supreme Court in 316 U.S. 450, 86 L Ed 1591). The question at issue in said case is 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 taxes to a foreign government upon such income, a part of which has come to the American corporation as dividends. After quoting the pertinent portion of Section 131(f) of Revenue Act of 1936, the court resolved the issue as follows: "xxx xxx xxx "An example of the operation of the section easier to grasp than plaintiff's situation may be given as follows: The A Company, an American corporation, has a wholly owned subsidiary in Canada, the C Company. The C Company has taxable income in Canada of $100,000, and is there taxed on that income at the rate of 20%, its Canadian tax thus being $20,000. Its remaining income is its 'accumulated profits' according to the definition of section 131(f). The C Company remits as a dividend to its sole stockholder, the A Company, the entire $80,000, and that amount is included by the A Company in its taxable income in the United States. To how much credit is the A Company entitled as against its income tax? "Plaintiff's claim is that the A Company would be entitled to credit for the entire $20,000 tax paid by the C Company in Canada. Defendant argues that the A Company would be entitled to credit for only $16,000, the amount of the tax paid by the C Company on the $80,000 remitted to the A Company and included in the A Company's taxable income . "[1] Both parties agree that the fraction of the foreign tax which is to be credited at home is to be arrived at by using the dividends remitted (80,000) as the numerator and the 'accumulated profits' (also 80,000 in the example) as the denominator. The fraction in the example is one over one, hence it does not affect the result. xxx xxx xxx "But the parties disagree as to what amount of foreign taxes to apply the fraction to, in order to produce the allowable credit on American taxes. The statute says the fraction should be applied to the income 'taxes paid by such foreign corporation to any foreign country. . . upon or with respect to the accumulated profits of such foreign corporation from which such dividends were paid.' As we have seen, there is a specific definition of the term 'accumulated profits' in the same paragraph of the statute. The defendant's contention, therefore, that the American credit is the amount of the 20% Canadian tax on $80,000, the amount of the C Company's accumulated profits, seems to fit the statutory language with exactness ." (Emphasis ours) From the foregoing decision, it is clear that the U.S. corporation is entitled to credit, not for the entire amount of $20,000 as tax paid by the Canadian subsidiary, but only for $16,000 which represents that portion of the said tax paid by the latter on the amount of dividends actually remitted to the former. The foregoing principles laid down in the case of the American Chicle Co. applies in the case of dividends received from a less developed country corporation. "'In the case of a subsidiary which is not a less developed country corporation, all of the foreign income, etc. taxes can be allowed as a credit since in this case the entire earnings before tax are taken into account by the domestic corporation. In the case of dividends received from less developed country corporations only the portion of the foreign income, etc. taxes attributable to the accumulated earnings and profits after foreign taxes can be allowed as a credit since only these earnings and profits are taken into income by the domestic corporation. This continues the principles laid down by the Supreme Court in American Chicle Co. v. United States, 316 US 450 (1942).'" (Sen Rep No. 1881, 87th Cong, 2d Sess, p. 69." (Merten's Vol. 5, Chap. 33, page 83, par. 33.14) (Emphasis ours) "'Paragraph 2 of subsections (a) and (b), and subparagraph (B) of subsection (c)(1), of section 902 as revised continue existing law for determining the amount of foreign income tax deemed to have been paid by a domestic corporation with respect to dividends from less developed country corporations.'" Sen Rep No. 1881, 87th Cong. 2d Sess. pp. 222-223. (Ibid.) 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. In view thereof, the withholding tax rate of 35% applies on the dividends you will remit to your parent company. cd