BIR Ruling No. 323-11

August 23, 2011 BIR RULING NO. 323-11 Section 28 (B) (5) (b), NIRC; BIR Ruling No. 080-80; BIR Ruling No. DA-224-98; BIR Ruling No. DA-287-7-1-98; BIR Ruling No. 208-89; 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: Mr. Herminigildo G. Murakami Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated July 29, 2010 requesting, on behalf of your client, HSBC Institutional Trust Services (Asia) Ltd., ("HSBC Trust") , confirmation of your opinion that the dividends paid by domestic companies to HSBC Trust, as trustee of the JF Asia New Frontier Fund, are subject to the fifteen percent (15%) final withholding tax under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. It is represented that HSBC Trust is a company incorporated in Hong Kong and registered as a trust company under the Trustee Ordinance of Hong Kong; that HSBC Trust is formerly known as Bermuda Trust (Far East) Limited; that HSBC Trust is a trustee of several funds, one of which is the JF Asia New Frontier Fund which was registered pursuant to Section 104 of the Securities and Futures Ordinance of Hong Kong; that the JF Asia New Frontier Fund is governed by the laws of Hong Kong, and is authorized or deemed authorized as a collective investment scheme under the above mentioned provision of the Securities and Futures Ordinance and the Code on Unit Trust and Mutual Funds of Hong Kong; that as trustee of JF Asia New Frontier Fund, HSBC Trust invested in shares of stock of Philippine companies; that it holds legal title to the investments, as the investments are registered in HSBC Trust name; and that as such, HSBC Trust, as trustee of JF Asia New Frontier Fund, receives dividends from Philippine companies. In reply, please be informed Section 28 (B) (5) (b) of the Tax Code, as amended by Republic Act (R.A.) No. 9337, 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." aATHIE 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 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) . 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. Hong Kong, the country of domicile of HSBC Trust, 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 HSBC Trust from Philippine Corporations 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." 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." HEcTAI 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." In view of the foregoing, this Office hereby confirms your opinion that the cash dividends received by HSBC Trust, as trustee of JF Asia New Frontiers Fund, from domestic corporations are subject to 15% final withholding tax imposed under Section 28 (B) (5) (b) of the Tax Code. 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