BIR Ruling No. 304-11

August 15, 2011 BIR RULING NO. 304-11 Section 28 (B) (5) (b), NIRC; BIR Ruling No. 080-80; BIR Ruling No. 208-89; BIR Ruling No. DA-224-98; BIR Ruling No. DA-287-98; BIR Ruling No. DA-233-99; BIR Ruling No. DA-296-06; BIR Ruling No. DA-567-06 Manabat Sanagustin & Co. The KPMG Center, 9F 6787 Ayala Avenue, Makati City Attention: Atty. Ma. Georgina J. Soberano Principal, Tax Gentlemen : This refers to your letter dated February 23, 2011, requesting, on behalf of your client LaPrairie Group Contractors International Ltd. ("LGCI") , confirmation that cash dividends received by LGCI from CE Casecnan Water and Energy Co., Inc. ("CECWEC") are subject to the preferential fifteen percent (15%) final withholding tax (FWT) rate prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. Documents submitted disclose that LGCI is a non-resident foreign corporation incorporated under the laws of Barbados with registered business address at the 2nd Floor, Building #2, Chelston Park, Collymore Rock, St. Michael, Barbados; that LGCI is not registered in the Philippine Securities and Exchange Commission (SEC); that LGCI holds a total of One Hundred Fifteen Thousand Seventy Four (115,074) common shares, with par value of PhP1.00 each, or a total of PhP115,074.00 in CECWEC, a domestic corporation with business office address at the 24th Floor, 6750 Building, Ayala Avenue, Makati City, Philippines; that LGCI has an equivalent to a fifteen percent (15%) shareholding in CECWEC; that CECWEC declared cash dividends to its stockholders, including LGCI, on February 3, 2011 which will be paid out on February 28, 2011; and that a certification from the tax authorities in Barbados state that dividends received by a resident Barbadian corporation are not subject to tax. In reply, please be informed Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, provides that "(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%), 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." DTSIEc Based on the foregoing Section, inter-corporate dividends received by a non-resident foreign corporation from a domestic corporation and collected and paid in accordance with Section 57 (A) of the Tax Code are subject to a final tax rate of 15% of the total amount thereof, subject to the condition that the country in which the non-resident foreign corporation is domiciled allows a tax credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to the rate of twenty (20%) [fifteen (15%) percent beginning 1 January 2009] of such dividend. This tax treatment was previously applied to a case involving dividends paid by a domestic corporation to a company incorporated under the laws of Hong Kong, this Office, in BIR Ruling No. 080-80 dated June 18, 1980 , held that dividends remitted to Bermuda Trust (Far East) Limited, a non-resident foreign corporation domiciled in Hong Kong are subject only to the 15% withholding tax. It is noted that HSBC Trust is formerly known as Bermuda Trust (Far East) Limited. This Office previously ruled that, where the country of the non-resident recipient of the dividends does not impose any tax on dividends received from the domestic company, the dividends will be subject to final withholding tax at the rate of 15% (BIR Ruling Nos. 208-89 dated 28 September 1989 and DA-233-99 dated 14 April 1999, BIR Ruling No. DA-296-06 dated 3 May 2006) . Recently, this Office has had the opportunity to apply the aforesaid Section 28 (B) (5) (b) of the Tax Code, as amended, to a similar case involving dividends paid by a domestic corporation to a company incorporated under the laws of Hong Kong, BIR Ruling No. DA-567-06 dated September 20, 2006 ruled that "In reply, please be informed that Section 28(B)(5)(b) of the Tax Code of 1997, as amended provides, viz. : "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 nonresident 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 twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three (33%) in 1999, and thirty-two percent (32%) thereafter on corporations (now 35% pursuant to Republic Act No. 9337) and the fifteen percent (15%) tax on dividends as provided in this subparagraph." 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)." (Emphasis supplied) 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." The foregoing rulings and jurisprudence was affirmed in BIR Ruling No. DA-(C-289) 711-09 dated November 27, 2009 wherein it was opined that: "Based on the foregoing, considering that Bermuda does not impose tax on dividends received by corporations domiciled therein pursuant to The Exempted Undertaking Tax Protection Act of 1966, this Office hereby confirms your opinion that dividends to be paid by IAC, a domestic corporation, to IAHL, a non-resident foreign corporation domiciled in Bermuda, are subject to the 15% preferential withholding tax rate under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended." In this case, the Department of Inland Revenue of the Government of Barbados has issued a Certification that LGCI will not be subject to tax on dividends received from its non-resident affiliate in accordance with the provisions of the Income Tax Act Cap 73 Section 9 (1) (l) (iii), which states that: "Calculation of Assessable Income: Amounts not Included 9. (1) In calculating the assessable income of a person for an income year, the following amounts shall not be included, namely (a) . . . xxx xxx xxx (l) (i) . . . (ii) . . . TaDAHE (iii) in respect of income year 2007 and subsequent income years, amounts received by a resident company registered in Barbados as dividends, other than preference dividends, from a non-resident company when the Barbados resident is a shareholder representing at least 10 percent of the capital of the non-resident company and such shareholding is not held solely for the purpose of portfolio investments;" Hence, considering that LGCI holds more than 10% of the capital of the non-resident company, the dividends received by it, as a company registered in Barbados, shall not be included in calculating the assessable income under the Income Tax Act of Barbados. In view of the foregoing and the fact that LGCI has been certified by the Barbadian Department of Inland Revenue that it will not be subject to tax on dividends received from its non-resident affiliate in accordance with the provisions of the Income Tax Act Cap 73 Section 9 (l) (iii), this Office hereby confirms your opinion that cash dividends to be received by LGCI from CECWEC on February 28, 2011 are subject to 15% final withholding tax imposed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. 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