BIR Ruling No. 410-12

June 15, 2012 BIR RULING NO. 410-12 Section 28 (B) (5) (b) of the Tax Code of 1997, as amended; BIR Ruling No. 057-2012; BIR Ruling No. 304-2011 CE Casecnan Water and Energy Company, Inc. 24th Floor, 6750 Ayala Avenue Makati City 1226 Attention: Joseph L. Sullivan President Gentlemen : This refers to your letter dated September 21, 2011 requesting for the confirmation of your opinion that the dividend remittances of CE CASECNAN WATER AND ENERGY COMPANY, INC. ("CE CASECNAN") to CE Casecnan Ltd. ("CEL") shall be subject to the 15% preferential rate under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, otherwise known as the "tax sparing credit". It is represented that CE CASECNAN is a corporation duly organized and existing under the laws of the Philippines, with principal place of business at the Municipality of Pantabangan, Province of Nueva Ecija, and with business address at 24th Floor, 6750 Ayala Avenue, Makati City. CE CASECNAN was formed in September 1994 to design, develop, construct, erect, assemble, commission, finance, own and operate a combined irrigation and hydroelectric power generation project and related facilities for the conversion into electricity of water provided by and under contract with the National Irrigation Administration ("NIA") with a rated capacity of 150 megawatts and for the supply of water for agricultural purposes to the NIA located in Nueva Ecija and Nueva Vizcaya provinces in the island of Luzon in the Republic of the Philippines. CEL, on the other hand, is a company duly organized and existing under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM11 Bermuda; that CE Casecnan Ltd. is an exempted company certified by the Registrar of Companies in its August 15, 1994 Certificate of Incorporation pursuant to section 14 of the Bermuda Companies Act of 1981. CEL is not registered with the Securities and Exchange Commission as a foreign corporation engaged in trade or business in the Philippines as evidence by a Certificate of Non-Registration issued on April 8, 2011. ITEcAD On April 8, 2011, the Board of Directors of CE CASECNAN approves and authorized the distribution and payment on or before April 30, 2011 of cash dividends in the amount of US$13,000,000.00, such dividends to be paid out 15% to CEL. As of the date of declaration and payment of the said dividends, CEL held One Hundred Fifteen Thousand Seventy Four (115,074) common shares of CE CASECNAN, representing 14.9999% or approximately 15% of the outstanding shares of stock of CE CASECNAN. In support of your request, you submitted the following documents: 1) Original Consularized Certificate of Incorporation issued by the Registrar of Companies in Bermuda certifying CEL as an exempt company pursuant to section 14 of the Companies Act of 1981 and The Exempted Undertaking Tax Protection Act of 1966 dated August 15, 1994; 2) Certificate of Compliance of CEL issued by the Registrar of Companies in Bermuda dated September 9, 2010; 3) Original Consularized Assurance issued by the Minister of Finance of Bermuda to CEL that imposition of taxes shall not be applicable to CEL under The Exempted Undertaking Tax Protection Act of 1966 dated November 29, 1994; 4) Original Certificate of Non-registration issued by the SEC; 5) Original Board Resolution of CE CASECNAN dated April 8, 2011 declaring the distribution of dividends to its stockholders, which includes the share of CEL; 6) Special Power of Attorney authorizing CE CASECNAN to prepare and file this request for ruling on behalf of CEL and Certification authorizing Joseph Sullivan to file request for ruling; 7) Certified true copy of SEC Certificate of Incorporation of CE CASECNAN; 8) Certified true copy of SEC Articles of Incorporation of CE CASECNAN; DHATcE 9) Certified true copy of 2011 SEC General Information Sheet of CE CASECNAN; and 10) Certified true copy of BIR Certificate of Registration of CE CASECNAN. In reply, please be informed that 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." Under the said provision, 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%). In other words, the only condition for the application of the tax sparing credit is that the country-domicile of the recipient corporation allows a credit against the tax due from the non-resident foreign corporations. In stressing the rationale of the above principle, the Supreme Court, in the case of Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation , 1 and later reiterated in Singapore Telecom International Pte. Ltd. vs. Commissioner of Internal Revenue , 2 that the preferential tax treatment of the final withholding tax on dividends received by a non-resident foreign corporation from a domestic corporation applies if the domiciliary law of the non-resident foreign corporation allows [a similar] tax credit for the taxes deemed paid in the Philippines. cTDIaC In the instant case, Bermuda does not impose any income tax as held in BIR Ruling No. 111-88 dated March 18, 1988. 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 the dividends received, is sufficient basis for the applicability of the 15% tax rate. Thus: "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." Thus, the exemption from taxes by the country of domicile of the non-resident corporate stockholder on the dividends received is sufficient for the applicability of the 15% tax rate. In this case, CEL has received a written undertaking from the Minister of Finance in Bermuda under The Exempted Undertaking Tax Protection Act of 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital assets, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to CE CASECNAN LTD., or any of its operations until March 28, 2016. The undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda. Moreover, the Ministry of Finance of the Government of Bermuda issued a Certification that Bermuda is not an Income Tax jurisdiction and persons residing therein are not subject to Income Tax. SUCH BEING THE CASE, this Office holds that dividends to be paid by CE CASECNAN WATER AND ENERGY COMPANY, INC. to a non-resident foreign corporation domiciled in Bermuda. CE CASECNAN WATER AND ENERGY COMPANY, INC. on or before April 30, 2011, are subject to the 15% final withholding tax as prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling No. 057-2012 dated February 9, 2012 and BIR Ruling No. 304-2011 dated August 15, 2011) EITcaD 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 Footnotes 1. 204 SCRA 377. 2. CTA Case No. 7406.