Withholding Tax Rate Applicable to Cash Dividends

August 25, 1999 BIR RULING NO. 134-99 Secs. 57 (A), 58 Tax Code-000-00-134-99 Meralco Ortigas Avenue Pasig City Attention: Mr . Anthony V . Rosete Head, General Legal and Mr . German F . Martinez, Jr . Head, Tax and Tariff Gentlemen : This refers to your letter dated August 12, 1999 requesting for a clarification on the withholding tax rate applicable to cash dividends declared by your Company from its retained earnings in 1998 but payable to stockholders in 1999. LLpr It is represented that in a letter dated February 2, 1999 addressed to Deutsche Bank Manila regarding the tax rate to be applied on dividends declared in 1998 but payable in 1999 to non-resident foreign corporations whose countries have no tax treaties with the Philippines, Assistant Commissioner for Collections Melchor S. Ramos, this Bureau, opined as follows: ". . . Section 28(B)(1) of Republic Act No. 8424 (sic) or the Tax Reform Act of 1997 provides that a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to 34% of the dividends received in 1998, 33% in 1999 and 32% in the year 2000 and thereafter and shall be withheld by the payor corporation and/or person. "However, the tax rate of dividends shall be based on income forming part of retained earnings as of the taxable year. Hence, thirty four percent (34%) shall be imposed on dividends on income forming part of retained earnings as of December 31, 1998 even if declared or distributed after January 1, 1999. The same treatment shall apply in 1999, 2000 and year/s thereafter." However, it is your view that the withholding tax on dividends from a domestic corporation is a final tax on income, which accrues when the dividends are actually or constructively received by the stockholder. Thus, such dividends are subject to the withholding tax rate prescribed for the year when such dividends are received by the stockholder, not the rate for the year when the corporation earned the income or retained earnings from which the dividends are declared. It is, therefore, your position that dividends declared from retained earnings as of December 31, 1998 which are distributed/paid to stockholders on or after January 1, 1999 are subject to the withholding tax rate prescribed for 1999, that is, eight percent (8%) for individual citizen and individual resident alien of the Philippines and thirty-three percent (33%) for non-resident foreign corporations, notwithstanding the fact that such dividends form part of the income or retained earnings in 1998. In reply, please be informed that pursuant to the Tax Code of 1997, cash and/or property dividends paid to certain taxpayers during the taxable year shall be subject to the following income tax rates, viz: (1) A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual (that is, a citizen or resident alien ) from a domestic corporation . . .: 6% beginning January 1, 1998; 8% beginning January 1, 1999; 10% beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not even if declared or distributed on or after January 1, 1998 be subject to this tax . (Sec. 24(B)(2) of the Tax Code of 1997) (2) Cash and/or property dividends from a domestic corporation . . . received by a nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax of 20% of the total amount thereof. (Sec. 25 (A)(2) of the Tax Code of 1997) (3) There shall be levied, collected and paid for each taxable year upon the entire net income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as . . . cash and/or property dividends . . ., a tax equal to 25% of such income . (Sec. 25(B) of the Tax Code of 1997) (4) A foreign corporation not engaged in trade or business within the Philippines shall pay a tax equal to 35% of the gross income received during the taxable year from all sources within the Philippines, such as . . . dividends . . ., Provided, That effective January 1, 1998, the rate of income tax shall be 34% ; effective January 1, 1999, the rate shall be 33% ; and effective January 1, 2000 and thereafter, the rate shall be 32% . (Sec. 28(B)(1) of the Tax Code of 1997) (5) Likewise, a final withholding tax at the rate of 15% is hereby imposed on the amount of cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation, which shall be collected and paid as provided in Sec. 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 20% for 1997, 19% for 1998, 18% for 1999, and 17% thereafter, which represents the difference between the regular income tax of 35% in 1997, 34% in 1998, 33% in 1999, and 32% thereafter on corporations and the 15% tax on dividends as provided in this subparagraph . (Sec. 28(B)(5)(b) of the Tax Code) In relation to this, Sec. 57(A) of the Tax Code of 1997, as implemented by Rev. Regs. No. 2-98, as amended, provides, among others, that the tax imposed or prescribed by Secs. 24(B)(2), 25(A)(2), 25(B), 28(B)(1) and 28(B)(5)(b) on specified items of income shall be withheld by the payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Sec . 58 of the Tax Code . In other words, the tax imposed on the subject cash and/or property dividends is a final withholding tax and the tax rate depends not only on who is the particular taxpayer concerned but also the time or date when the said dividends were paid by the payor-corporation to the subject stockholders . Thus, the withholding tax rate on the said dividends should be the rate prescribed on the particular date when the dividends are paid to the stockholders but not the tax rate for the taxable year when the corporation earned the profits or retained earnings from which the dividends were declared. prLL For this purpose, Sec. 2.57.4 of Rev. Regs. No. 2-98, as amended, provides that the obligation of the payor to deduct and withhold the tax arises at the time an income is paid or payable, whichever comes first . The term "payable" refers to the date the obligation becomes due, demandable or legally enforceable. In view of all the foregoing, the withholding tax rates applicable to the cash dividends declared by your company from your retained earnings for the taxable year 1998 but payable to or actually or constructively received by your stockholders in 1999 are the rates prescribed in 1999 notwithstanding the fact that such cash dividends declared form part of the income or retained earnings of your corporation in 1998, viz: 8% in the case of individual citizen and individual resident alien ; 20% in the case of nonresident alien individual engaged in trade or business in the Philippines ; 25% in the case of nonresident alien individual not engaged in trade or business in the Philippines ; 33% in the case of nonresident foreign corporation not engaged in trade or business in the Philippines ; and 15% only in the case of nonresident foreign corporation not engaged in trade or business in the Philippines , if 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 20% for 1997, 19% for 1998, 18% for 1999, and 17% for the year 2000 and thereafter. In view thereof, the subject opinion dated February 2, 1999 issued by the Assistant Commissioner for Collections Melchor S. Ramos, this Bureau, is hereby amended or modified accordingly. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue