BIR Ruling No. 420-11

November 3, 2011 BIR RULING NO. 420-11 Section 28 (B) (5) (b), NIRC; BIR Ruling No. 008-00; BIR Ruling No. DA-365-99; BIR Ruling No. DA-029-02 Manabat Sanagustin & Co. The KPMG Center, 9F 6787 Ayala Avenue, Makati City Attention: Atty. Herminigildo G. Murakami Principal, Tax Gentlemen : This refers to your letter dated December 9, 2010, requesting, on behalf of your client Pensionskasse des Bundes PUBLICA (The Federal Pension Fund PUBLICA) ("PUBLICA") confirmation that dividends paid by domestic companies to PUBLICA, 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 PUBLICA is an undertaking of the Swiss Confederation established under public law with a separate legal personality and that its registered office is in Berne, Switzerland and is entered in the commercial register as CH1.0100; that PUBLICA was established for the primary purpose of insuring employees against economic consequences of old age, invalidity and death; that the Swiss Federal Chancellery has confirmed that PUBLICA is a Swiss foundation for occupational pensions; and that on August 2010, PUBLICA started investing in listed equities in the Philippines; and that a certification from the Tax Authority of the canton of Berne confirming that "the tax exemption granted to the Swiss Federal Pension Fund PUBLICA extends to dividends on Philippine-and hence foreign-shares and also applies to the canton of Berne." 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. DTIACH 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." 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. The Tax Authority of the canton of Bern has confirmed the tax exemption granted to the Swiss Federal Pension Fund PUBLICA extends to dividends on Philippine hence, foreign-shares and also applies in the canton of Bern, thus: "Under Art. 2 of the Swiss Federal Act on the Federal Pension Fund (PUBLICA Act, SR 177.222.1), PUBLICA is an undertaking of the Swiss Confederation established under public law with a separate legal personality and its registered office in Bern. As such, under Art. 56 let. a of the Swiss Federal Act on Direct Federal Taxation (DFTA, SR 641.11), Art. 23 para. 1 let. a of the Swiss Federal Act on the Harmonisation of Direct Taxation at Cantonal and Communal Levels (DTHA, SR 642.14) and Art. 83 para. 1 let. 1 of the Canton of Bern Tax Act (StG, BSG 661.11), it is exempt from liability for taxation, subject to the provisions governing property gains tax." CTDacA In relation to this is the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals (G.R. No. L-68375, April 15, 1988) , the Supreme Court, affirmed the decision of the Court of Tax Appeals that dividends declared by a Philippine corporation and receives by its parent corporation organized under the laws of Switzerland is subject to tax at the rate of 15%, and held that: ". . . the fact that Switzerland did not impose any tax or the dividends received by Glaro 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 corporations' interest here and discourage them from investing capital in our country. Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner that "since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."" The above pronouncement by the Supreme Court served as an established precedent in a number of BIR Rulings namely BIR Ruling Nos. 008-00 dated January 5, 2000; DA-365-6-24-99; 208-89 dated September 28, 1989; 111-88 dated March 18, 1988; 178-85 dated October 4, 1985; 030-80 dated February 15, 1980 declaring that dividends declared by domestic corporation in favor of a Swiss company is subject to 15% withholding tax pursuant to Section 28 (B) (5) (b) of the Tax Code. (BIR Ruling No. DA-029-02 dated March 05, 2002) Even after effectivity and amendment of the 1997 Tax Code, this Office had the opportunity rule on similar cases involving tax treatment of dividends paid by a domestic corporation to a company incorporated under the laws of Switzerland. BIR Ruling No. DA-365-99 dated June 24, 1999 affirmed earlier issued precedent rulings, to wit: "Moreover, since Switzerland does not impose any tax on dividends received from foreign sources, the dividends to be remitted by ABB, Inc. to its parent company in Switzerland will be subject to the withholding tax at the rate of 15% (BIR Ruling Nos. 30-80 dated February 15, 1980 and 85-178 dated October 4, 1985)" CSDTac The issue has also been settled in BIR Ruling No. 008-00 dated January 5, 2000, citing the Wander case and quoted as follows: "There can be no uncertainty that the purpose of the above-quoted provision is to subject SGS Philippines, Inc. to the preferential tax rate of 15% withholding tax on the dividends remitted to its foreign parent company, Societe Generale de Surveillance of Switzerland, a non-resident foreign corporation, subject to the condition that Switzerland 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 18% which represents the difference between the regular income tax (33%) on corporations for the taxable year 1999 and the 15% tax on dividends. Otherwise, to run counter to the very spirit and intent of said law will definitely affect the foreign corporations' interest here and discourage them from investing capital in our country. Similarly situated is the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. , No. L-68375 dated April 15, 1998 where the Supreme Court ruled ". . . since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed." Based on the foregoing, SGS Philippines, Inc., being a subsidiary of Societe Generale de Surveillance is subject to the preferential tax rate of 15% withholding tax on dividends pursuant to Section 28(B)(5)(b) of the Tax Code of 1997." The BIR opined in BIR Ruling No. DA-029-02 dated March 5, 2002 that the dividends declared by Lamitube prior to the transfer of the shares and received by Propack Switzerland is subject to tax at the rate of 15% pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997. In view of the foregoing and the fact that the Tax Authority of the canton of Bern that the tax exemption granted to the Swiss Federal Pension Fund PUBLICA extends to dividends on its Philippine shares, this Office hereby confirms your opinion that dividends paid by domestic companies to PUBLICA, are subject to the fifteen percent (15%) FWT rate as prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. EDaHAT 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