BIR Ruling No. 270-11

August 3, 2011 BIR RULING NO. 270-11 Sec. 28 (B) (5) (b) of the Tax Code of 1997; BIR Ruling No. 208-89; BIR Ruling No. DA-287-98; BIR Ruling No. DA-567-06 Manabat Sanagustin & Co., CPAs The KPMG Center, 9/F 6787 Ayala Avenue Makati City Attention: Mr. Herminigildo G. Murakami Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated October 5, 2010 stating that your client, Bank of East Asia (Trustees) Limited (BEA), is a company incorporated in Hong Kong and registered as a trust company under the Trustee Ordinance of Hong Kong; that as Trustee of JF Asean Fund, BEA invested in shares of stock in Philippine companies; that it holds legal title to the investments, as the investments are registered in BEA's name; that as such, BEA, as Trustee of JF Asean Fund, receives dividends from Philippine companies; that JF Asean Fund was established on July 7, 1983; and that the fund is domiciled and governed by the laws of Hong Kong and is authorized or deemed authorized as a collective investment scheme under Section 104 of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and the Code on Unit Trusts and Mutual Funds. Based on the foregoing representations, you now request confirmation of your opinion that the cash dividends paid by domestic companies to BEA, as Trustee of JF Asean Fund, is subject to 15% final withholding tax under Section 28 (B) (5) (b) of the Tax Code of 1997. 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 a 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%). Corollarily, Hong Kong, the country of domicile of BEA, operates on a territorial tax system wherein persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business. Conversely, profits derived outside of Hong Kong are not subject to tax in Hong Kong. Considering that the dividends received by BEA, as Trustee of JF Asean Fund, from Philippine companies are profits derived from outside of Hong Kong these are therefore not subject to tax in Hong Kong. Section 14 of the Hong Kong Inland Revenue Ordinance provides: "Charge of profits tax (1) Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part." This is fortified in BIR Ruling No. DA-567-06 dated September 20, 2006 , where this Office ruled that "Based on the above provision, dividends declared by a domestic corporation in favor of a nonresident foreign corporation domiciled in a country that allows a credit of 17% (after the year 1999) on such dividends are subject to the withholding tax rate of 15%. Several rulings of this Office consistently held that the same 15% rate applies even more if the country of the recipient non-resident foreign corporation exempts from tax the dividends declared by the domestic corporation. ( BIR Ruling dated February 23, 1978; BIR Ruling Nos. 208-89 dated September 28, 1989; DA-287-7-1-98 and DA-224-98 ). Moreover, this was clarified in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc ., G.R. No. L-68375 dated April 15, 1998, where the Supreme Court ruled that '. . . since the Swiss Government does not impose any tax on the dividends to be received by the said corporation in the Philippines, the condition imposed under the abovementioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed.' It appearing from the supporting documents that you submitted, i.e. , a photocopy of the book Asia Pacific Taxation, 1995 Edition, KPMG International Tax Services, p. 89, stating that dividends (both foreign and Hong Kong source) are not subject to Profits Tax and a letter-confirmation from UHY Tai Kong CPA Limited, 21/F China-Chem Tower, Connaught Road, Central Hong Kong, that the HK Inland Revenue Department treats all dividends as non-taxable and that Hong Kong Profits Tax rates for year of assessment 2005/06 are 17.5% (for corporations) and 16% (for unincorporated businesses), the dividends declared and/or will be declared by Technopaq, Inc. to Power Best Properties, Inc. are not subject to income tax on dividends received from foreign sources under the Hong Kong Laws, this Office hereby confirms that cash dividends that will be paid by Technopaq, Inc. to Power Best Properties, Inc., shall be subject to a 15% withholding tax pursuant to Section 28(B)(5)(b) of the Tax Code of 1997, as amended." WHEREFORE, in view of the foregoing , this Office hereby CONFIRMS your opinion that the cash dividends received by BEA, as Trustee of JF Asean Fund, from Philippine companies are subject to the 15% final withholding tax as prescribed in Section 28 (B) (5) (b) of the Tax Code of 1997, as of the date of JF Asean Fund's domicile in Hong Kong in September 2009 and thereafter. However, cash dividends received from Philippine companies prior to such date are not included. 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