BIR Ruling No. 012-13

January 3, 2013 BIR RULING NO. 012-13 28 (B) (5) (b); 368-11 SGV & CO 6760 Ayala Avenue Makati City Attention: Atty. Antonette C. Tionko Principal, Tax Services Gentlemen : This refers to your letter dated May 10, 2012 stating that your client, American International Underwriters (Philippines), Inc. (AIUP), is a corporation organized and existing under the laws of the Philippines with principal place of business at 47th Floor PBCom Tower, 6795 Ayala Avenue cor. V.A. Rufino Street, Salcedo Village, Makati City; that AIUP is 99.968% owned by Chartis Overseas Limited (Bermuda Co.), a non-resident foreign corporation organized and existing under the laws of Bermuda; that the Bermuda Co. is domiciled in Bermuda and has a principal place of business at The Chartis Bermuda Building, 29 Richmond Road, Pembroke, Hamilton HM 08, Bermuda; that it is a tax resident of Bermuda as evidenced by the tax residence certificate dated December 15, 2011 issued by the tax authorities of Bermuda; that it is further represented that taxes computed on profits or income (including dividends), or computed on any capital asset, gain or appreciation, or any tax in the nature of estate, duty or inheritance tax are not imposed on Bermuda Co. pursuant to The Exempted Undertakings Tax Protection Act, as certified in the Assurance issued by the Minister of Finance of Bermuda; that the Bermuda Co. is not doing business in the Philippines and is not duly registered as confirmed in a certification issued by the SEC; and that per Secretary's Certificate dated January 26, 2012, the Board of Directors of the Corporation declared cash dividends in the aggregate amount of P105,000,000.00 payable to the Corporation's stockholders of record as of December 16, 2011 based on their respective shareholdings as of said date, which cash dividends shall be paid and distributed to all said stockholders on June 30, 2012. Based on the foregoing representations, you now request confirmation of your opinion that the dividends to be paid by AIUP, a domestic corporation, to Chartis Overseas Limited, a non-resident foreign corporation domiciled in Bermuda, are subject to the 15% preferential tax rate under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. In reply thereto, please be informed that Section 28 (B) (5) (b) of the Tax Code of 1997 provides that "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax on Nonresident Foreign Corporation . EHTISC 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 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%) 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;" Prescinding from the above-cited provisions, it is undisputed that a final withholding tax at the lower rate of fifteen percent (15%) is imposed on cash dividends received by a non-resident foreign corporation from a domestic corporation, 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 fifteen percent (15%). In stressing the rationale of the above principle, the Supreme Court in the case of Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA 377, and later reiterated in Singapore Telecom International Pte. Ltd. vs. Commissioner of Internal Revenue, CTA Case No. 7406, that the preferential tax treatment of 15% of the final withholding tax on dividends received by a non-resident foreign corporation from a domestic corporation applies if the domiciliary law of the non-resident foreign corporation allows [a similar] tax credit for the taxes deemed paid in the Philippines. CSDcTH The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. , has ruled that "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 . . . 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 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." Thus, the exemption from taxes of the dividends received by the country of domicile of the non-resident corporate stockholder is sufficient for the applicability of the 15% tax rate. In this case, the Company has received a written undertaking from the Minister of Finance of Bermuda under The Exempted Undertaking Tax Protection Act of 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital assets, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to Chartis Overseas Limited until March 28, 2016. Moreover, the Ministry of Finance of the Government of Bermuda issued a Certification that Bermuda is not an income tax jurisdiction and persons residing therein are not subject to income tax. SUCH BEING THE CASE, this Office holds that dividends in the aggregate amount of P105,000,000.00 to be paid by AIUP to a non-resident foreign corporation domiciled in Bermuda, Chartis Overseas Limited, on or before June 30, 2012, are subject to the 15% final withholding tax as prescribed in Section 28 (B) (5) (b) of the Tax Code of 1997. HDTSIE 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue