Withholding Tax Rate on Dividends Paid by a Philippine Corporation to a US Corporation

March 9, 1984 BIR RULING NO. 058-84 24-b-000-00-058-84 Gentlemen : This refers to your letter dated February 10, 1983 requesting a ruling as to whether dividends paid by a Philippine corporation to a US corporation shall be subject to withholding tax at the rate of 15% under the National Internal Revenue Code or at the rate of 10% under the RP-US Tax Treaty. In reply, I have the honor to inform you that if the U.S. recipient-corporation owns at least 10% of the voting stock of a Philippine paying-corporation, the requirement of Section 24(b)(1)(iii) of the Tax Code, as amended, is met because the indirect tax credit or "deemed paid" credit will operate in U.S. under the provisions of the U.S. Federal Tax Code. Accordingly, the dividends paid by the Philippine corporation shall be subject to the withholding tax at the rate of 15% only. (BIR Ruling No. 258-82 dated October 12, 1982) Article 11, paragraph (2) of the RP-US Tax Treaty provides: "(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed (a) 25 percent of the gross amount of the dividend; or (b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation." The above ruling of this Office holding that the dividends shall be subject to only 15% rate does not contravene the above-quoted provision of the tax treaty which imposes a tax not exceeding 20% if the recipient U.S. corporation owns at least 10% of the voting stock of the Philippine corporation because the 15% tax is within the allowable treaty rate. On the other hand, if the U.S. corporation owns less than 10% of the voting stock of the Philippine corporation, Section 24(b)(1)(iii) of the Tax Code will not apply and therefore, the dividends issued by it will be subject to tax at the rate of 25% pursuant to subparagraph (a) of the above-quoted provision. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner