BIR Ruling No. 082-13

February 21, 2013 BIR RULING NO. 082-13 Section 28 (B) (5) (b), 1997 Tax Code; BIR Ruling No. 004-07 Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: Alexander B. Cabrera Managing Partner, Tax Gentlemen : This refers to your letter dated November 9, 2010, requesting, on behalf of your client, INTERNATIONAL FLAVORS AND FRAGRANCES PHILS. CORP. ( "IFF Phils" ), confirmation that dividends payments of IFF Phils to INTERNATIONAL FLAVORS AND FRAGRANCES, INC. ("IFF US") are subject to the 15% final withholding tax (FWT) rate prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. ADCETI Documents submitted disclose that IFF Phils, with TIN 000-280-761-000, is a corporation organized under the laws of the Philippines and registered with the Securities and Exchange Commission (SEC) under SEC Registration No. 114539 dated October 3, 1997 under its former name Bush Boake Allen Philippines, Inc.; that its corporate name was amended to IFF Phils on November 15, 2001; that IFF Phils is engaged in the business of manufacturing, distribution and wholesale of compound flavorings, essences, spice products and other product lines; that IFF US is certified by the Internal Revenue Service (IRS) as a U.S. Corporation and resident of the United States of America for purposes of U.S. taxation; that the SEC has certified that its records do not show the registration of IFF US as a corporation or partnership; that IFF US owns about 30% of the total issued and outstanding capital stocks of IFF Phils; and that IFF US receives dividend payments from the IFF Phils. In reply, please be informed 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 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%), 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." TDESCa The tax on inter-corporate dividends is reduced by 20% from 35% to 15% subject to the conditions mentioned above. The tax deemed paid is adjusted to correspond to the decreasing corporate income tax rate. The law specifies that such tax credit for "taxes deemed paid in the Philippines", must, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the preferred 15% rate. ( Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation , G.R. 66838, December 2, 1991) In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA shall allow tax credit in favor of IFF US for "taxes deemed paid in the Philippines" against its US taxes. ( BIR Ruling No. 004-07 dated February 19, 2007 ) The Supreme Court in Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corp. (P & G) and Court of Tax Appeals (G.R. 66838, December 2, 1991) had occasion to rule that dividends paid to a US resident shall be subject to fifteen percent (15%) dividend tax rate, as follows: "It is important to note that Section 34(b) (1), NIRC, now Section 25(b)(5)(B) of the Tax Code, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividends tax waived by the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines." In BIR Ruling No. 004-07 dated February 19, 2007 , this Office cited and applied ITAD Ruling No. 175-00 dated November 14, 2000 which reiterated the findings of the Supreme Court in the Procter and Gamble case, saying that it " has confirmed that Section 901 of the United States Internal Revenue Code meets the 20% deemed tax credit requirement provided under then Section 25 (b) (5) (B) of the 1993 Tax Code [now Section 28 (B) (5) (b)] ." The pertinent provision of the US Tax Code in relation to the reduced tax rate of fifteen percent (15%) pursuant to the tax sparing provision of the National Internal Revenue Code, states: CaHcET "Section 901. "Taxes of foreign countries and possessions of United States. (a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for each taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26(b). (b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a): (a) Citizens and domestic corporations . In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and xxx xxx xxx Section 902. Deemed paid credit where domestic corporation owns 10% or more of voting stock of foreign corporation. (a) Taxes paid by foreign corporation treated as paid by domestic corporation For purposes of this subpart, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of such foreign corporation's income taxes as DAHSaT xxx xxx xxx (1) the amount of such dividends bears to; (2) such foreign corporation's undistributed earnings." The above quoted provisions of the US Tax Code shows that: a. US tax law (Section 901) grants a tax credit for the amount of the dividend tax actually paid ( i.e., withheld) from the dividend payments; and b. US tax law (Section 902) grants a "deemed paid" tax credit for a proportionate part of the corporate income tax actually paid to the Philippines. It is important to note that it is not required that the US must give a "deemed paid" tax credit for the dividend tax waived by the Philippines in making applicable the preferred 15% tax rate. The NIRC only requires that the US " shall allow " a "deemed paid" tax credit in an amount equivalent to the twenty percent (20%) waived by the Philippines. In view of the foregoing jurisprudence, precedent rulings and the fact that this Office had already recognized that U.S. tax laws allow a credit against the tax due from the U.S. taxes deemed to have been paid in the Philippines equivalent to at least 20%, this Office hereby confirms your opinion that the amount of dividends received by IFF US from IFF Phils is subject to 15% final withholding tax imposed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. 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