BIR Ruling No. 148-15

May 6, 2015 BIR RULING NO. 148-15 Sec. 28 (B) (5) (b) of the Tax Code of 1997, as amended; BIR Ruling No. 057-2012; BIR Ruling No. 304-2011 CE Mahanagdong II, Inc. 24th Floor, 6750 Ayala Avenue Makati City Attention: Mr. Joseph L. Sullivan President Gentlemen : This refers to your letter dated 15 August 2013 requesting for a confirmation of your opinion that the dividend remittance of CE MAHANAGDONG II, INC. (CEM II) to CE Mahanagdong Ltd. (CEM Ltd.) 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 the "tax sparing credit". It is represented that CEM II with Taxpayer Identification No. 207-359-295-000 is a corporation duly organized and existing under the laws of the Philippines; that CEM II was formed in October 1999, primarily to acquire, hold, own and use for investment, or otherwise, sell or dispose of properties of every kind and description and wherever situated, as to the extent permitted by law; that on the other hand, CEM Ltd. is a company duly organized and existing under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM11 Bermuda; that it is an exempted company as certified by the Registrar of Companies in its 24 February 1994 Certificate of Incorporation pursuant to Section 14 of the Bermuda Companies Act of 1981; that CEM Ltd. is not registered with the Securities and Exchange Commission (SEC) as foreign corporation engaged in trade or business in the Philippines as evidenced by a Certificate of Non-registration issued by the latter on 05 August 2013; that CEM Ltd. owns 100% of the total issued and outstanding shares of stock of CEM II; and that on 29 August 2011, the Ministry of Finance of the Government of Bermuda issued a Certification that Bermuda is not an income tax jurisdiction and persons residing therein are not subject to income tax. On 12 August 2013, CEM II declared cash dividends in the amount of USD1,796,000.00 in favor of CEM Ltd., the beneficial owner of the entire outstanding capital stock of CEM II, out of the unrestricted retained earnings of CEM II as of 31 December 2012 as supported by a resolution of the Board of Directors authorizing the same payable on or before 31 August 2013. Based on the foregoing representations, you know request confirmation of your opinion that the dividends to be remitted by CEM II to CEM Ltd. are subject to the 15% final withholding tax pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. In reply thereto, please be informed that Section 28 (B) (5) (b) of the Tax code of 1997 provides that "SEC. 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (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 (15%) tax on dividends as provided in this subparagraph: Provided, that the 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." Presiding from the above-cited 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 non-resident foreign corporations. In stressing the rationale of the above principle, the Supreme Court in the case of Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA 377 , and later reiterated in Singapore Telecom International Pte. Ltd. vs. Commissioner of Internal Revenue, CTA Case No. 7406 , that the preferential tax treatment of 15% 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. The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. , 160 SCRA 573 (1988) has ruled that "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 . . . 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, CEM Ltd. has received a written undertaking from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act of 1966 that in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital assets, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to CEM Ltd. until 28 March 2016. Moreover, the Ministry of Finance of the Government of Bermuda issued a Certification dated 29 August 2011 that Bermuda is not an income tax jurisdiction and persons residing therein are not subject to income tax. SUCH BEING THE CASE, this Office holds that cash dividends in the amount of US$1,796,000.00 declared by CEM II on 12 August 2013 to a non-resident foreign corporation domiciled in Bermuda, CEM Ltd., payable on or before 31 August 2013, are subject to the 15% final withholding tax as prescribed payable in Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling Nos. 304-11 dated 15 August 2011; 057-12 dated 09 February 2012) 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