BIR Ruling No. 168-13

April 30, 2013 BIR RULING NO. 168-13 Section 28 (B) (5) (b) of the 1997 NIRC; BIR Ruling No. 439-2011 Gulf Oil Philippines, Inc. 39 M. Lozada St., Brgy. Sto. Rosario Silangan, Pateros, Metro Manila Attention: Ms. Miriam Q. Merto Financial and Logistics Controller Gentlemen : This refers to your letter dated July 20, 2009, as indorsed by the Chief of International Tax Affairs Division on January 11, 2010, requesting for a confirmatory ruling on the withholding tax applicable on the dividends to be paid by Gulf Oil Philippines Incorporated (GOPI) to Gulf International Lubricants Ltd. (GILL), a non-resident foreign corporation domiciled and registered in Cayman Islands pursuant to Section 28 (B) (5) (b) of the 1997 Tax Code, as amended. It is represented that GOPI (TIN 202-863-707) is a domestic corporation duly organized and validly existing under the laws of the Republic of the Philippines. It is involved in the manufacture and distribution of 'GULF' brand lubricant oils and down-stream derivative products. The company was registered with the Securities and Exchange Commission (SEC) under Company Reg. No. AA1998-07188 dated May 18, 1998. It is likewise registered with the Board of Investments (BOI) under Certificate of Registration No. 2001-012 on January 25, 2001 with a non-pioneer preferred activity an industry participant with new investment in the production of lubricating base oils under Republic Act (RA) No. 8479. GOPI was established under a joint venture between Philippine National Oil Company (PNOC), a domestic corporation with office address located at Fort Bonifacio, Taguig City and GILL of Cayman Islands, British West Indies having 35% and 65% ownership, respectively. The list of stockholders of GOPI as of May 5, 2009 is as follows: aSHAIC Name Shares Subscribed Type/ % of Number Amount Amount Paid Class Ownership (in PhPesos) (in PhPesos) GILL Common 65.00 1,021,015 102,101,500.00 102,101,500.00 PNOC Common 35.00 549,778 54,977,800.00 54,977,800.00 Sanjay Hinduja Common 1 100.00 100.00 Ramesh V. Rao Common 1 100.00 100.00 Alain Dujean Common 1 100.00 100.00 Pedro A. Aquino Common 1 100.00 100.00 Joselito D. Gonzales Common 1 100.00 100.00 Joy Sarkar Common 1 100.00 100.00 Zayber Protacio Common 1 100.00 100.00 Total 1,570,800 157,080,000.00 157,080,000.00 ======== =========== =========== On the other hand, GILL is a company duly organized and validly existing under the laws of Cayman Islands, British West Indies. Its registered business address is at Caledoninan House, PO Box 1043, Grand Cayman, KY1-1102, Cayman Islands. GILL is internationally known as a producer, manufacturer and marketer of petroleum products and specialties, including automotive and industrial lubricants and technical and industrial oils and has the right to license the use of certain internationally known and advertised brands and trademarks. By virtue of the certification issued by SEC dated June 5, 2009, GILL is not registered either as a corporation or as a partnership licensed to do business in the Philippines, as such, GILL is considered a non-resident foreign corporation. Likewise, a Certification of Undertaking as to Tax Concessions Law (1999 Revision) Undertaking as to Tax Concessions dated August 18, 2009 (and shall be effective for twenty (20) years thereafter) states that no law imposing any tax to be levied on profits, income, gains or appreciations shall apply to GILL or its operations. GOPI started declaring cash dividends for their stockholders of record as of May 2005 and become consistent in the declaration and payment of all cash dividends from year 2005 until 2009 on the following dates (per GOPI's Corporate Secretary's Certificates submitted), viz. : Date of Pay-out Rate of cash dividend declaration Year covered End of March '10 Php1.57 per share out of its unrestricted retained earnings FY 2008-09 June 30 and Php1.43 per share out of its unrestricted retained earnings FY 2007-08 July 31, '08 End of June and Php1.30 per share out of its unrestricted retained earnings FY 2006-07 end of August '07 No date stated Php1.10 per share out of its unrestricted retained earnings FY 2005-06 No date stated Php1.00 per share out of its unrestricted retained earnings FY 2004-05 In reply, please be informed that Section 28 (B) (5) (b) of the Tax Code, as amended, provides that "(B) Tax on Nonresident Foreign Corporation. "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. "(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." LLphil Based on the above provision, the final withholding tax on dividends on Philippine-source dividends derived by a nonresident foreign corporation shall be reduced to 15% if the country of domicile of the nonresident foreign corporation receiving the dividends allows (as a credit against the tax due in the recipient's home country) a deemed paid tax equivalent to 15% beginning January 1, 2009. However, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. , (G.R. No. L-68375 dated April 15, 1988), the Supreme Court held that the provision of Section 28 (B) (5) (b) [formerly, Section 24 (b) (1)], also applies when the country of domicile of the nonresident foreign corporation receiving the dividends does not impose any tax on dividends. In the said case, Wander Philippines, Inc. (Wander), a domestic corporation, remitted dividends to Glaro S.A. Ltd. (Glaro), a nonresident foreign corporation domiciled in Switzerland. Under Swiss law, dividends derived by Glaro from sources outside Switzerland are exempt from Swiss income tax. Given this, the Supreme Court ruled that the subject dividends were subject to 15% income tax by reason that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the required (minimum) 20% deemed paid tax credit but, also, full tax credit on such dividends. Thus, the 15% final withholding tax on dividends distributed to nonresident foreign corporations pursuant to Section 28 (B) (5) (b) of the 1997 Tax Code, as amended, applies in two instances: i. The country of domicile of the nonresident foreign corporation receiving the dividends allows (as a credit against the tax due in the recipient's home country) a deemed paid tax equivalent to 15%; or ii. The country of domicile of the nonresident foreign corporation receiving the dividends does not impose any tax on dividends. DIESaC Applying the pronouncement in the said Wander case, and since the law of Cayman Islands provides that no tax is levied on profits, income, gains or appreciations of its resident corporations, any dividends which is derived by said corporations from sources outside their jurisdiction are exempt from income tax, if the income tax imposed by the source country on such dividends is equal to or greater than 15%, and since Philippine income tax on such dividends is 15% under Section 28 (B) (5) (b) or 30% under Section 28 (B) (1) of the said Tax Code, as amended, dividends to be paid by GOPI to GILL are therefore subject to 15% preferential withholding tax rate pursuant to Section 28 (B) (5) (b) of the same Tax Code, as amended. It is to be noted, that in as much as the transaction referred to herein by GOPI (per Secretary's Certificate dated May 19, 2009) merely pertains to cash dividend declaration amounting to Php1.57 per share for fiscal year 2008-2009 to the stockholders of record as of May 5, 2009 and to be made by end of June and end of August 2009, the tax exemption granted herein is only limited to such transaction. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue