BIR Ruling No. 069-15

March 16, 2015 BIR RULING NO. 069-15 Sec. 28 (B) (5) (b) of the Tax Code of 1997, as amended; BIR Ruling No. 442-2013; BIR Ruling No. 283-2013; BIR Ruling No. 271-2013; BIR Ruling No. 118-2013; BIR Ruling No. 410-2012 CE Casecnan Water and Energy Company, Inc. 24th Floor, 6750 Ayala Avenue Makati City 1226 Attention : Joseph L. Sullivan President Gentlemen : This refers to your letter dated 25 November 2013 requesting for 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 of 1997, as amended, otherwise known as "tax sparing credit". It is represents that CE CASECNAN, with Taxpayer Identification No. 004-500-931-000, is a corporation organized and existing under the laws of the Philippines with principal place of business at Pantabangan, Nueva Ecija, and with business address at 24th Floor, 6750 Ayala Avenue, Makati City. CE CASECNAN was incorporated in September 1994 to design, develop, construct, erect, assemble, commission, finance, own and operate a combined irrigation and hydro-electric 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 purpose to NIA located in the province of Nueva Vizcaya and Nueva Ecija. CEL, on the other hand, is a company duly organized and existing under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM11 Bermuda. CEL is not a registered foreign corporation or partnership with the Securities Exchange Commission. CEL owns 115,074 shares of CE CASECNAN or about 15% of the total subscribed equity of the latter. The Registrar of Companies in the Islands of Bermuda has issued a Certificate of Compliance dated 20 December 2012 and certified that CEL is a company duly incorporated under the laws of Bermuda. Furthermore, CEL is an exempted company per its Certificate of Incorporation dated 15 August 1994 issued by the Registrar of Companies for the Islands of Bermuda. CEL was likewise issued by the Registrar of Companies for Minister of Finance of Bermuda on 20 December 2012 a Tax Assurance (effective until 31 March 2035) which states that "in the event of there being enacted in Bermuda any legislation imposing tax computed on profits or income or computed on any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any tax described herein shall not be applicable to such undertakings or to any of its operations or the shares, debentures or other obligations of the said undertakings." On 15 November 2013, during a meeting of the board of directors, CE CASECNAN declared cash dividends in the amount of US$8,500,000.00 for payment on or before 30 November 2013 and distributed to the stockholders of record to wit: 1) Seventy percent (70%) to CE Casecnan II, Inc. 2) Fifteen percent (15%) to LaPrairie Group contractors (International) Ltd. 3) Fifteen percent (15%) to CEL. In reply, please be informed that 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 Income 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 the non-resident foreign corporation. In stressing the rationale of the above principle, the Supreme Court, in the case of Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation [204 SCRA 377 (1991)] and later reiterated in Singapore Telecom International Pte. Ltd. vs. Commissioner of Internal Revenue , CTA Case No. 7406 dated 7 April 2009 that the preferential tax treatment 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. 410-12 dated 15 June 2012 . The Supreme Court, in the case of the 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 the 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 Glaro 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." 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, CEL was likewise issued by the Registrar of Companies for Minister of Finance of Bermuda on 20 December 2012 a Tax Assurance (effective until 31 March 2035) which states that "in the event of there being enacted in Bermuda any legislation imposing tax computed on profits or income or computed on any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any tax described herein shall not be applicable to such undertakings or to any of its operations or the shares, debentures or other obligations of the said undertakings." SUCH BEING THE CASE, this Office holds that cash dividends equivalent to 15% of US$8,500,000.00 declared on 15 November 2013 to be paid by CE CASECNAN to CEL, a non-resident foreign corporation domiciled in Bermuda on or before 30 November 2013, are subject to the 15% final withholding tax as prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling Nos. 442-2013 dated November 27, 2013; 283-2013 dated July 23, 2013; 271-2013 dated July 17, 2013; and 118-2013 dated March 22, 2013) 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