BIR Ruling No. 313-14

August 4, 2014 BIR RULING NO. 313-14 Sec. 28 (B) (5) (b) of the Tax Code of 1997; BIR Ruling No. 323-11; BIR Ruling No. 013-13 Asia Pacific Business Legal Consulting 2nd Floor Bldg. B. Mactan Marina Mall Mactan Economic Zone 1 Ibo, Lapulapu City, Cebu Attention: Atty. Laurias Dela Pea Managing Partner Gentlemen : This refers to your letter dated January 11, 2010 requesting confirmation that the cash and/or property dividends paid or which shall be paid by your client, Cebu Pacific Catering Services, Inc. (CPCS), to Cathay Pacific Catering Services (H.K.) Ltd. (CPCS-HK) is subject to the 15% withholding tax rate under 1997 Tax Code, as amended. It is represented that CPCS is a domestic corporation duly organized and existing under Philippine laws with principal office at Mactan Economic Zone (MEZ) 1, Lapu-lapu City. It was registered with the Securities and Exchange Commission (SEC) to engage in and carry on a catering business supplying food, beverage, liquor, cigarettes, gifts and miscellaneous merchandise for air carriers, both international and domestic and to carry on a general catering business on wholesale basis. The Company is registered with PEZA as an Economic Export Enterprise under PEZA Certificate of Registration No. 94-48 to engage in in-flight catering services for international airlines at the MEZ. It is currently entitled to a 5% preferential tax in lieu of payment of all national and local taxes. EDCIcH It is also represented that, CPCS-HK is a non-resident foreign corporation organized and existing under the laws of Hong Kong with office address at 35/F Two Pacific Place 88, Queensway Hong Kong. CPCS-HK is not engaged in trade or business in the Philippines as evidenced by a Certificate of Non-Registration of Corporation issued by the SEC. At present, CPCS-HK owns 40% of the outstanding shares of stock of CPCS. As stockholder, CPCS-HK has received and expects to receive in the future cash and/or property dividends from CPCS and that on August 4, 2010, in a Board Resolution was passed whereby CPCS declared cash dividends amounting to Twenty Million pesos (P20,000,000.00), taken from the accumulated earnings as of June 30, 2010, to be distributed to all stockholders of record. A Certification was issued by the Inland Revenue Department of Hong Kong, stating that the dividend income received or to be receive by CPCS-HK from CPCS, a company incorporated and carrying on business in the Philippines, during the fiscal years ended 31 December 2011 to 31 December 2014 ( i.e. , years of assessment 2011/2012 to 2014/15) is not subject to Hong Kong Profits Tax. Based on the foregoing, you now request a confirmation of your opinion that the cash and/or property dividends that were paid and/or which shall be paid by CPCS to CPCS-HK are subject to 15% withholding tax pursuant to Section 28 (B) (5) (b) of the 1997 Tax Code, 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 . STIcEA 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;" Under the aforequoted provision, the dividends to be paid by CPCS to CPCS-HK are subject to fifteen percent (15%) Philippine income tax if CPCS-HK's country of domicile, Hong Kong, shall allow CPCS-HK a 15% deemed paid tax credit against its income tax due on such dividends in Hong Kong. Applying the above-cited provisions, in relation to Section 28 (B) (5) (b) of the Tax Code, and pursuant to the letter issued by Inland Revenue Department of Hong Kong dated 16 January 2013, it is clear that the dividend income received or to be receive by CPCS-HK will not be taxable in Hong Kong on the part of CPCS-HK. It is worthy to mention that 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 dividends received, is sufficient basis for the applicability of the 15% tax rate. Thus: IECcaA "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 by Glaxo 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." The above ruling was reiterated in the case of Caltex (Philippines), Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4986 dated October 6, 1995 , wherein it was held that the dividends remitted by a domestic corporation to a resident of Bermuda is subject to 15% withholding tax inasmuch as Bermuda does not impose any tax on dividends received by corporations domiciled therein, pursuant to the Exempted Undertaking Tax Protection Act of 1966. In view of the foregoing, this Office hereby confirms your opinion that cash dividends declared by CPCS on August 4, 2010 received or to be receive by CPCS-HK shall be subject to the preferential withholding tax rate of 15% pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, considering that the dividend income are exempt from Hong Kong Profits Tax. (BIR Ruling No. 323-11 dated August 23, 2011 and BIR Ruling No. 013-13 dated January 3, 2013) 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