BIR Ruling No. 056-12

February 9, 2012 BIR RULING NO. 056-12 Section 28 (B) (5) (b), NIRC; BIR Ruling No. 008-00; BIR Ruling No. 304-2011 Manabat Sanagustin & Co. The KPMG Center, 9F 6787 Ayala Avenue, Makati City Attention: Atty. Ma. Georgina J. Soberano Principal, Tax Gentlemen : This refers to your letter dated April 29, 2011, requesting, on behalf of your client LaPrairie Group Contractors International Ltd. ("LGCI") ,confirmation that cash dividends received by LGCI from CE Casecnan Water and Energy Co.,Inc. ("CECWEC") are subject to the preferential fifteen percent (15%) final withholding tax (FWT) rate prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. Documents submitted disclose that LGCI is a non-resident foreign corporation incorporated under the laws of Barbados with registered business address at the 2nd Floor, Building #2, Chelston Park, Collymore Rock, St. Michael, Barbados; that LGCI is not registered in the Philippine Securities and Exchange Commission (SEC);that LGCI holds a total of One Hundred Fifteen Thousand Seventy Four (115,074) common shares, with par value of PhP1.00 each, or a total of PhP115,074.00 in CECWEC; a domestic corporation with business office address at the 24th Floor, 6750 Building, Ayala Avenue, Makati City, Philippines; that LGCI has an equivalent to a fifteen percent (15%) shareholding in CECWEC; that CECWEC declared cash dividends to its stockholders, including LGCI, on April 8, 2011 which will be paid out on or before April 30, 2011; and that a certification from the tax authorities in Barbados state that dividends received by a resident Barbadian corporation are not subject to tax. In reply, please be informed Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, provides that "(B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. DACTSH 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%), 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." Based on the foregoing Section, inter-corporate dividends received by a non-resident foreign corporation from a domestic corporation and collected and paid in accordance with Section 57 (A) of the Tax Code are subject to a final tax rate of 15% of the total amount thereof, subject to the condition that the country in which the non-resident foreign corporation is domiciled allows a tax credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to the rate of twenty (20%) [fifteen (15%) percent beginning 1 January 2009] of such dividend. In the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. ,G.R. No. L-68375 dated April 15, 1988, the Supreme Court ruled that "In the instant case, Switzerland did not impose any tax on the dividends received by Glaxo. Accordingly, Wander claims that full credit is granted and not merely credit equivalent to 20%.Petitioner, on the other hand, avers the tax sparing credit is applicable only if the country of the parent corporation allows a foreign tax credit not only for the 15 percentage-point portion actually paid but also for the equivalent twenty percentage-point portion spared, waived or otherwise deemed as if paid in the Philippines; that private respondent does not cite anywhere a Swiss law to the effect that in case where a foreign tax, such as the Philippine 35% dividend tax, is spared, waived or otherwise considered as if paid in whole or in part by the foreign country, a Swiss foreign-tax credit would be allowed for the whole or for the part, as the case may be, of the foreign tax so spared or waived or considered as if paid by the foreign country. xxx xxx xxx Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed." The foregoing jurisprudence was applied and cited in BIR Ruling No. 008-00 dated January 5, 2000 wherein this Office ruled that SGS Philippines, Inc. is subject to the preferential tax rate of 15% withholding tax on the dividends remitted to its foreign parent company, Societe Generale de Surveillance of Switzerland, a non-resident foreign corporation, as follows: "Similarly situated is the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. ,No. L-68375 dated April 15, 1998 where the Supreme Court ruled IASCTD "...since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed." In this case, the Department of Inland Revenue of the Government of Barbados has issued a Certification that LGCI will not be subject to tax on dividends received from its non-resident affiliate in accordance with the provisions of the Income Tax Act Cap 73 Section 9 (1) (l) (iii),which states that: "Calculation of Assessable Income: Amounts not Included 9. (1) In calculating the assessable income of a person for an income year, the following amounts shall not be included, namely (a) ... xxx xxx xxx (l) (i) ... (ii) ... (iii) in respect of income year 2007 and subsequent income years, amounts received by a resident company registered in Barbados as dividends, other than preference dividends, from a non-resident company when the Barbados resident is a shareholder representing at least 10 percent of the capital of the non-resident company and such shareholding is not held solely for the purpose of portfolio investments;" Hence, considering that LGCI holds more than 10% of the capital of the non-resident company, the dividends received by it, as a company registered in Barbados, shall not be included in calculating the assessable income under the Income Tax Act of Barbados. In BIR Ruling No. 304-2011 dated August 15, 2011, the BIR ruled that: "In view of the foregoing and the fact that LGCI has been certified by the Barbadian Department of Inland Revenue that it will not be subject to tax on dividends received from its non-resident affiliate in accordance with the provisions of the Income Tax Act Cap 73 Section 9(l)(iii), this Office hereby confirms your opinion that cash dividends to be received by LGCI from CECWEC on February 28, 2011 are subject to 15% final withholding tax imposed under Section 28 (B)(5)(b) of the Tax Code of 1997, as amended." Based on the above jurisprudence, rulings and the fact that LGCI has been certified by the Barbadian Department of Inland Revenue that it will not be subject to tax on dividends received from its non-resident affiliate in accordance with the provisions of the Income Tax Act Cap 73 Section 9 (1) (l) (iii), this Office hereby confirms your opinion that the cash dividends to be received by LGCI from CECWEC on or before April 30, 2011 are subject to 15% final withholding tax imposed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. 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. cADEIa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue