BIR Ruling No. 057-12

February 9, 2012 BIR RULING NO. 057-12 Sec. 28 (B) (5) (b) of the Tax Code of 1997; BIR Ruling No. 304-11 CE Casecnan Water and Energy Company, Inc. 24th Floor, 6750 Ayala Avenue Makati City Attention: Joseph L. Sullivan General Manager Gentlemen : This refers to your letter dated August 17, 2011, requesting confirmation of your opinion that dividend remittances of CE Casecnan Water and Energy Company, Inc. (CE Casecnan) to CE Casecnan Ltd. (CEL) shall be subject to the 15% preferential final withholding tax rate under Section 28 (B) (5) (b) of the Tax Code, as amended. It is represented that CE Casecnan with a Tax Identification Number 004-500-931-000 is a corporation organized and existing under the laws of the Philippines with principal place of business at the Municipality of Pantabangan, Province of Nueva Ecija; that CE Casecnan was formed in September 1994 to design, develop, construct, erect, assemble, commission, finance, own and operate a combined irrigation and hydroelectric power generation project and related facilities for the conversion into electricity of water provided by and under contract with the National Irrigation Administration (NIA) with a rated capacity of 150 megawatts and for the supply of water for agricultural purposes to the NIA located in the Nueva Ecija and Nueva Vizcaya provinces in the island of Luzon in the Republic of the Philippines; that CEL, on the other hand, is a company organized and existing under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM11 Bermuda; that it is an exempted company as certified by the Registrar of Companies in its August 15, 1994 Certificate of Incorporation pursuant to Section 14 of the Bermuda Companies Act of 1981; that CEL is not registered with the Securities and Exchange Commission (SEC) as a foreign corporation engaged in trade or business in the Philippines; that CEL owns 15% of the total issued and outstanding shares of stock of CE Casecnan; and that on August 12, 2011, CE Casecnan declared cash dividends as evidenced by a resolution of the Board of Directors authorizing the same to be paid on or before August 31, 2011 of a dividend of $7 million. In reply thereto, please be informed that Section 28 (B) (5) (b) of the Tax Code of 1997 provides that SEACTH "SEC. 28. Rates of Income Tax on Foreign Corporations. 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 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;" Under the said provision, 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 other words, the only condition for the application of the tax sparing credit is that the country-domicile of the recipient corporation allows a credit against the tax due from non-resident foreign corporations. 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, 1 and later reiterated in Singapore Telecom International Pte. Ltd. vs. Commissioner of Internal Revenue, 2 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. In the instant case, Bermuda does not impose any income tax as held in BIR Ruling No. 111-88 dated March 18, 1988. The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. 3 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." CcTIDH Thus, the exemption from taxes by the country of domicile of the non-resident corporate stockholder on the dividends received 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 in Bermuda under the Exempted Undertakings Tax Protection Act 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 asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to CE Casecnan Ltd. or any of its operations until March 28, 2016. The undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda. 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 to be paid by CE Casecnan to a non-resident foreign corporation domiciled in Bermuda, CEL on or before August 31, 2011, are subject to the 15% final withholding tax as prescribed in Section 28 (B) (5) (b) of the Tax Code of 1997. ( BIR Ruling No. 304-11 dated August 15, 2011 ). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 204 SCRA 377. 2. CTA Case No. 7406. 3. 160 SCRA 573 (1988).