BIR Ruling No. 243-14

June 30, 2014 BIR RULING NO. 243-14 Sec. 28 (B) (5) (b) of NIRC; BIR Ruling No. 057-12; BIR Ruling No. 304-11 Isla Lipana & Co. 29th floor, Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Malou P. Lim Partner Gentlemen : This refers to your letter dated October 29, 2010 stating that your client, CE Casecnan II, Inc. (CE II), is a corporation organized and existing under the laws of the Philippines with principal office address at the 24th Floor, 6750 Building, Ayala Avenue, Makati City; that CE II was formed in September 1994 primarily to hold shares in enterprises or form partnership which will construct, erect, assemble, commission, operate and own power generating plants and the related facilities for the conversion into electricity of geothermal and other energy resources provided by and under contract with the Philippine Government or any government owned and controlled corporation; that on the other hand, CE Casecnan Ltd. (CEL) is a company organized and existing under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM 11 Bermuda; that it is an exempted company as certified by the Registrar of Companies in its August 15, 1994 Certificate of Incorporation pursuant to Section 14 of the Bermuda Companies Act of 1981; that it owns 99.99% of the total issued and outstanding shares of stock of CE II; that on October 14, 2010, CE II declared dividends to CEL as evidenced by a resolution of the Board of Directors authorizing the same, to be paid on October 29, 2010; and that CEL therefore will receive dividends in an amount equal to its share in the $77,223,060 total dividends declared. In support to your request, you have submitted the following documents, to wit: 1. Certificate of Good Standing of CEL issued by the Registrar of Companies in Bermuda; 2. Certificate of Incorporation issued by the Registrar of Companies in Bermuda certifying CEL as an exempt company pursuant to Section 14 of the Companies Act of 1981; 3. Letter from the Office of the Tax Commissioner advising that Bermuda does not impose income tax; 4. Certificate of Non-Registration of CEL issued by the SEC; 5. Board Resolution of CE II dated October 14, 2010 declaring the distribution of dividends to CEL; and 6. Special Power of Attorney (SPA) authorizing Isla Lipana & Co. to prepare and file this request for ruling on behalf of the companies. Based on the foregoing representations, you now request confirmation of your opinion that the dividends to be remitted by CE II to CEL 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 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%) tax 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;" Prescinding from the above-cited provisions, 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 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. In the instant case, Bermuda does not impose any income tax as held in BIR Ruling No. 410-12 dated June 15, 2012. The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. , [160 SCRA 573 (1988)] has ruled that exemption from taxes by the country of domicile of the non-resident corporate stockholder on the dividends received, is sufficient basis for the applicability of the 15% tax rate. Thus: "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 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." Moreover, the Minister of Finance of the Government of Bermuda, through the Office of the Tax Commissioner, issued a Certification that Bermuda is not an Income Tax jurisdiction and persons residing therein are not subject to income tax. Thus, the exemption from taxes of the dividends received by the country of domicile of the non-resident corporate stockholder is sufficient for the applicability of the 15% tax rate. (BIR Ruling No. 057-12 dated February 9, 2012) SUCH BEING THE CASE, this Office holds that the cash dividends amounting to US$77,223,060.00 to be paid by CE II to a non-resident foreign corporation domiciled in Bermuda, CEL, on October 29, 2010, are subject to the 15% final withholding tax as prescribed in Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling Nos. 304-11 dated August 15, 2011 and 057-12 dated February 9, 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 Bureau of Internal Revenue