BIR Ruling No. 320-14

August 11, 2014 BIR RULING NO. 320-14 Section 28 (B) (5) (b), NIRC 1997; BIR Ruling No. 511-11; BIR Ruling No. 323-11 Quisumbing Torres Law Offices 12th Floor, Net One Center 26th Street, cor. 3rd Avenue Crescent Park West, Bonifacio Global City Taguig City Attention: Atty. Jose Jaime V. Cruz Atty. Kristine Anne V. Mercado-Tamayo Gentlemen : This refers to your letter dated 30 June 2009 requesting, on behalf of your client, State Grid International Development Limited ("SGIDL") , confirmation that dividends which SGIDL will derive from its shareholdings in the National Grid Corporation of the Philippines ("NGCP") are subject to 15% final withholding tax in accordance with Section 28 (B) (5) (b) of the 1997 Tax Code, as amended. Documents submitted show that SGIDL is a private corporation duly organized and existing under the laws of Hong Kong, with principal office at Room 904, Harvest Building, 29-35 Wing Kut Street, Central, Hong Kong SAR, China; that SGIDL is organized to engage in resource and logistics services; research and development of electricity technology products, operation and maintenance of electricity networks, electricity works design, construction, management, consultancy and technology services; that it is not registered to engage in business as a corporation or partnership in the Philippines; that NGCP is a domestic corporation organized and existing under Philippine laws, and duly registered with the Securities and Exchange Commission (SEC) under SEC Reg. No. CS200802746 dated 21 February 2008; that NGCP is a holder of a legislative franchise to engage in the business of operating and maintaining a nationwide transmission grid in the Philippines; that NGCP has an authorized capital stock of PhP2,000,000,000, which is divided into 2,000,000,000 common shares with a par value of PhP1.00 per share; that as of 28 May 2009, SGIDL is a stockholder of record of 800,000,000 common shares of the capital stock of NGCP, or approximately 40% of its total issued capital; that on 15 June 2009 , the Board of Directors of NGCP unanimously passed and approved a resolution declaring cash dividends amounting to P4.3 Billion Pesos from NGCP's unrestricted retained earnings payable not later than 30 June 2009 to its existing shareholders in proportion to their respective shareholdings. At the time of the declaration of the cash dividends by NGCP on 15 June 2009, SGIDL legally and beneficially owned a total of 800,000,000 common shares of NGCP's issued capital, as disclosed above. Records show that SGIDL received the amount of HK$233,376,771.00 from NGCP in July 2009. cSATEH You now request confirmation that the dividends payable by NGCP to SGIDL are subject to Philippine income withholding tax at the rate of 15% under Section 28 (B) (5) (b) of the Tax Code. In reply, please be informed that Section 28 (B) (5) (b) of the 1997 Tax Code, as amended, provides the rule for the tax treatment of intercorporate dividends received by non-resident foreign corporations, to wit: "(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 nonresident foreign corporation is domiciled, shall allow a credit against the tax due from nonresident 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 (15%) tax on dividends;" Based on the foregoing, 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%) percent [fifteen (15%) percent beginning 1 January 2009] of such dividend. (BIR Ruling No. 323-11 dated August 23, 2011; BIR Ruling No. 511-11 dated December 20, 2011) From the documents submitted, Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are generally taxable in Hong Kong. Conversely, profits sourced elsewhere are not subject to Hong Kong Profits Tax. Accordingly, under current tax laws and regulations of Hong Kong, dividends to be received by a resident of Hong Kong, such as SGIDL, from Philippine companies as foreign source income are not subject to Hong Kong Profits Tax, and the Inland Revenue Department of the Government of the Hong Kong Special Administrative Region treats all dividends received by residents of Hong Kong from foreign sources as non-taxable under Hong Kong Laws. aSCHIT 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%. In BIR Ruling No. 511-11 dated December 20, 2011 , this Office confirmed that the foregoing rule applies specifically to a company domiciled in Hong Kong, as we stated, thus: "In applying the aforesaid section to a case involving dividends paid by a domestic corporation to a company incorporated under the laws of Hong Kong, 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." This Office has likewise confirmed in BIR Ruling No. 323-11 dated August 23, 2011 , that "dividends paid by a domestic corporation to a company incorporated under the laws of Hong Kong, 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." Furthermore, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., 160 SCRA 573 (1988) , the Supreme Court ruled that an exemption from taxes by the country of domicile of the non-resident corporate stockholder on dividends received from Philippine sources is sufficient basis for the applicability of the 15% tax rate, viz. : "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. (Underscoring supplied) ECAaTS The ruling in the Wander Philippines case was reiterated in the case of Caltex (Philippines), Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4986 dated 6 October 1995 . Based on the foregoing, this Office hereby holds and confirms your opinion that, pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997 and considering that Hong Kong does not tax dividends derived by their residents from Philippine sources, the cash dividends received by SGIDL (a company domiciled in Hong Kong) amounting to HK$233,376,771.00 from NGCP in July 2009 are subject to preferential Philippine income tax at the rate of 15% of the gross amount of the dividends. This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation it will be disclosed 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