Taxability of Dividends Which Avon Cosmetics, Inc. Will Remit to Avon Products, Inc. (New York)

March 17, 1992 BIR RULING NO. 080-92 25 (b) (5) (B) 324-87 080-92 Romulo, Mabanta, Buenaventura, Sayoc and De Los Angeles Law Office Fourth Floor, King's Court 2129 Pasong Tamo Street Makati, Metro Manila Attention: Attys . Ricardo J . Romulo & Catherine T . Manahan Gentlemen : This refers to your letter dated July 26, 1991 requesting for a confirmation of your opinion that BIR Ruling dated May 10, 1982 to the effect that the dividends which your client, Avon Cosmetics, Inc. (formerly, Beautifont, Inc.), will remit to Avon Products, Inc. (New York) are subject to withholding tax at the rate of 15% only, pursuant to Section 25(b)(5)(B) of the Tax Code, as amended, remains valid and binding to date. It is represented that Avon Cosmetics, Inc., a corporation duly organized and existing under and by virtue of the Philippine laws, with principal address at 160 Legaspi Street, Legazpi Village, Makati, Metro Manila, is engaged in the wholesale of cosmetics and other beauty products in the Philippines; that 99.99% of its shares of stocks is owned by Avon Products, Inc. (Avon-New York), a non-resident foreign corporation duly organized and existing under the laws of New York, U.S.A. In letter dated September 24, 1991, counsel for ACI has submitted a certification dated September 6, 1991 of the external auditor of Avon Products, Inc., Coopers and Lybrand duly authenticated on September 9, 1991 by our Vice Consul in New York, New York to the effect that under Section 901 of the U.S. Internal Revenue Code, Avon Products, Inc. is permitted to claim a credit against its U.S. tax liability for Philippines taxes as follows: "1. Deemed Paid Foreign Tax Credit In the year of receipt of a dividend from Avon Cosmetics, Inc., API is permitted to claim a credit for the Philippine income taxes which have been imposed on the underlying earnings of Avon Cosmetics, Inc. of which the dividend is a distribution. In effect, this is a credit for the 35 percent Philippine corporate income tax imposed on those earnings; "2. Direct Foreign Tax Credit In addition, API is permitted to claim a credit for the Philippine withholding tax imposed on the dividend. We understand that the Philippines currently imposes withholding at a rate of 15% percent on dividends paid by Avon Cosmetics, Inc. to API." Likewise, the external auditor further attest that based on its review of API's U.S. federal income tax return for the tax year ended December 31, 1990 with respect to dividends received from Avon Cosmetics, Inc. during 1990 API has claimed, as appropriate, a foreign tax of $2,639,503 for the 35 percent Philippine corporate income tax on the distributed earnings and a direct credit for the 15 percent Philippine withholding tax imposed on dividends in the amount of $746,194. In reply thereto, I have the honor to inform you that considering that under the present provisions of the U.S. Federal Tax Code, the amount of tax deemed paid on such dividends, and accordingly, to be credited against U.S. tax on said dividends, meets the 20% requirement of Section 25(b)(5)(B) of the Tax Code, as amended, dividends which Avon Cosmetics, Inc. will remit to Avon Products, Inc. domiciled in the U.S. are subject to withholding tax at the rate of 15% only which is within the maximum ceiling of the 20% tax of the gross amount of the dividends as provided in Article 11(2)(b) of the RP-US Tax Treaty. (See En Banc Resolution of the Supreme Court dated December 2, 1991 in Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corporation G.R. No. 66838) In view thereof, your opinion that BIR Ruling dated May 10, 1982 to the effect that the dividends which Avon Cosmetics, Inc. (formerly Beautifont, Inc.) will remit to Avon Products, Inc. are subject to withholding tax at the rate of 15% pursuant to Section 25(b)(5)(B) of the Tax Code, as amended is still applicable, is hereby confirmed. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue