BIR Ruling No. 123-84

July 25, 1984 BIR RULING NO. 123-84 24-b-000-00-123-84 Gentlemen : This refers to your letter of May 15, 1984 requesting for a ruling that American Cable and Radio Corporation (ACRC) is subject to 15% tax on dividends received from Globe Mackay Cable and Radio Corporation (GMRC). It is represented that ACRC is a U.S. non-resident in the Philippines; that it owns 40% of the issued and outstanding common shares of GMRC; and that GMRC is a Philippine franchise holder subject to tax at the rate of 5% of its gross receipts in lieu of income tax. Art. 11 par. (2), sub-paragraph (b) of the RP-US Tax Treaty which provides the rates for intercorporate dividends derived in one country and remitted to the other, reads: "(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." Considering that ACRC satisfies the holding requirement of the treaty, the dividends it receives from GMRC are subject to the Philippine withholding tax of 20% of the gross amount thereof. The 15% tax on dividends under Sec. 24, (B),(1)(iii) of the Tax Code cited in your letter is not applicable. That rate is applied only if the country of the recipient a) allows a credit of the 20% tax on dividends "spared" by the Philippines, or b) exempts dividend income derived from the Philippines, both conditions of which are absent in this instant case. The function of Section 24, (B), (1), (iii) of the Tax Code is to serve as an incentive to foreign investors by reducing their total tax liability in the Philippines and in their residence countries. This is achieved if the investor is exempted from tax in his home country or if he is given total credit of 35% equivalent to the 35% statutory tax on dividends i.e., the 15% reduced tax actually paid and the 20% "deemed paid" tax. In view thereof the tax on dividends received by American Cable and Radio Corporation from Globe Mackay Cable and Radio Corporation are subject to 20% of the gross amount thereof. Very truly yours, (SGD.) RUBEN B. ANCHETA Acting Commissioner