BIR Ruling No. 069-13

February 18, 2013 BIR RULING NO. 069-13 Section 28 (B) (5) (b) 1997 Tax Code, as amended; BIR Ruling No. 323-11 Manabat Delgado Amper & Co. 5th Floor Salamin Building 197 Salcedo Street, Legazpi Village Makati City Attention: Nimrod I. Que Assistant Tax Manager Richard R. Lapres Tax Partner Gentlemen : This refers to your letter dated May 17, 2010, requesting confirmation that cash dividends to be paid by Datacraft Philippines, Inc. ("Datacraft") to JQ Network Pte. Ltd. ("JQ Network") are subject to the fifteen percent (15%) final withholding tax pursuant to Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997 ("Tax Code"), as amended. HEISca It is represented that JQ Network is a non-resident foreign corporation incorporated and existing under the laws of Singapore with address at 6 Temasek Boulevard #26-01/05 Suntec Tower Four Singapore 038986, as confirmed by its Certificate of Residence issued by the Inland Revenue Authority of Singapore; that JQ Network is not registered as a corporation or partnership licensed to do business in the Philippines per Certification of Non-Registration issued by the Securities and Exchange Commission ("SEC") dated February 26, 2010; that, on the other hand, Datacraft is a corporation organized and existing under the laws of the Philippines with office address at the G/F Philamlife Building, 126 L.P. Leviste Street, Salcedo Village, Makati City; that Datacraft is a company engaged to design, develop, supply, install, service and maintain data processing, telecommunications networking and similar equipment, provide technical support/consultation services in terms of communication or networking (both voice and data) as well as provide maintenance services to customers including telecom service providers and other corporations (domestic and multinational);that, as of September 30, 2009, JQ Network is the beneficial owner of 16,000 Datacraft voting shares out of its 240,000 total outstanding voting shares which accounts for 6.67% of the latter, as confirmed by the Certificate issued by the Corporate Secretary of Datacraft dated February 18, 2010; that a regular meeting was held on January 18, 2010 wherein the Board of Directors, in quorum, passed and approved a resolution resolving to declare and pay dividends amounting to One Hundred Twelve Million Five Hundred Twenty Three Thousand Four Hundred Sixty Three Pesos (Php112,523,463.00) out of the unrestricted retained earnings of Datacraft in the amount of One Hundred Eighteen Million Seven Hundred Sixty Three Thousand Four Hundred Sixty Three Pesos (Php118,763,463.00);and that the aforesaid cash dividends shall be distributed to all stockholders of record as of September 30, 2009. It is further represented that under Section 13, Subsections (6) to (9) of the Singapore Income Tax Act (SITA),it is provided that dividends derived by a resident of Singapore on and after June 1, 2003, from sources outside Singapore, are exempt from Singapore income tax if the income tax imposed by the source country on such dividends is at least 15%,and as further clarified by Inland Revenue Authority of Singapore (IRAS) Circular on "Tax Exemption for Foreign-Sourced Dividends, Foreign Branch Profits and Foreign-Sourced Service Income",which states that a tax resident of Singapore is exempt from tax on its dividends from a foreign country provided that certain conditions are met under Section 13 (8) of the said Act. In reply, please be informed that Section 28 (B) (5) (b) provides as follows: "SEC. 28. Rates of Income Tax on Foreign Corporations . " (B) Tax on Nonresident Foreign Corporation . " (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation . cHEATI " (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 nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident 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 ;" (Emphasis provided) Under the aforequoted provision, the dividends to be paid by Datacraft to JQ Network are subject to fifteen percent (15%) Philippine income tax if JQ Network's country of domicile, Singapore, shall allow JQ Network a 15% deemed paid tax credit against its income tax due on such dividends in Singapore. It is noted that Section 13 (8) of SITA provides as follows: "(8) Where the conditions specified in subsection (9) are satisfied, there shall be exempt from tax (a) Any dividend derived from any territory outside Singapore ; (b) Any profit derived from any trade or business carried on by a branch in any territory outside Singapore of a company resident in Singapore; and (c) Any income derived from any professional, consultancy and other services rendered in any territory outside Singapore only if the Comptroller is satisfied that the income is derived, for the purposes of this Act, from outside Singapore, CacEID and received in Singapore (a) On or after 1st of June 2003 by any person, not being an individual resident in Singapore; xxx xxx xxx" (9) The conditions referred to in subsection (8) are (a) the income is subject to tax of a similar character to income tax (by whatever name called) under the law of the territory from which the income is received; (b) at the time the income is received in Singapore by the person resident in Singapore, the highest rate of tax of a similar character to income tax (by whatever name called) levied under the law of the territory from which the income is received on any gains or profits from any trade or business carried on by any company in that territory at that time is not less than 15%;and (c) the Comptroller is satisfied that the tax exemption would be beneficial to the person resident in Singapore" (underscoring supplied) Applying the above-cited provisions, in relation to Section 28 (B) (5) (b) of the Tax Code, it is clear that the cash dividends declared by Datacraft's Board of Directors on January 18, 2010 will not be taxable in Singapore on the part of JQ Network . It is worthy to mention that the Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., 160 SCRA 573 [1988] has ruled that exemption from taxes by the country of domicile of the non-resident corporate stockholder on dividends received, is sufficient basis for the applicability of the 15% tax rate. Thus: "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 by Glaxo 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 for 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." HEIcDT The above ruling was reiterated in the case of Caltex (Philippines), Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4986 dated October 6, 1995 ,wherein it was held that the dividends remitted by a domestic corporation to a resident of Bermuda is subject to 15% withholding tax inasmuch as Bermuda does not impose any tax on dividends received by corporations domiciled therein, pursuant to the Exempted Undertaking Tax Protection Act of 1966. In view of the foregoing, this Office hereby confirms your opinion that dividends declared by Datacraft on January 18, 2010 shall be subject to the preferential withholding tax rate of 15% on the part of JQ Network pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, considering that under the SITA, dividends derived by JQ Network from sources outside Singapore, are exempt from Singapore income tax. ( BIR Ruling No. 323-11 dated August 23, 2011 ) 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