BIR Ruling No. 426-14

October 27, 2014 BIR RULING NO. 426-14 Sec. 28 (B) (5) (b); BIR Ruling No. 368-11; BIR Ruling No. 057-12 Manabat Sanagustin & Co., CPAs The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Attention: Atty. Ma. Georgina J. Soberano Principal, Tax Gentlemen : This refers to your letter dated January 25, 2012 requesting on behalf of your client, La Prairie Group Contractors International Ltd. ("LGCI"), for confirmation that cash dividends received by LGCI from CE Casecnan Water and Energy Co., Inc. ("CECWEC") are subject to the preferential fifteen percent (15%) final withholding tax (FWT) rate prescribed under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997 ("Tax Code of 1997") as amended by Republic Act No. 9337. It is represented that LGCI is a non-resident foreign corporation incorporated under the laws of Barbados, with registered business address at the 2nd floor, Building #2, Chelston Park, Collymore Rock, St. Michael, Barbados. It is neither registered nor doing business in the Philippines. LGCI holds a total of 115,074 common shares, with par value of Php1.00 each, or a total of Php115,074.00 in CECWEC. This is equivalent to a fifteen percent (15%) shareholding in CECWEC, a domestic corporation with business office address at the 24th Floor, 6750 Building, Ayala Avenue, Makati City, Philippines. In the special meeting of the Board of Directors of CECWEC held on January 13, 2012, the Board resolved that of the cash dividends in the amount of US$13,000,000.00 to be distributed, the equivalent of 15% thereof or US$1,950,000.00 will be distributed and paid to LGCI on or before January 31, 2012. ACcTDS Under Division E Section 9 (1) (l) (iii) of the Income Tax Act of Barbados, in calculating the assessable income of a person in respect of income year 2007 and subsequent income years, amounts received by a resident company registered in Barbados, as dividends, other than preference dividends, from a non-resident company when the Barbados resident is a shareholder representing at least 10 percent of the capital of the non-resident company and such a shareholding be not held solely for the purpose of the portfolio investments, are not included in assessable income; and therefore, not subject to tax. Thus, under the tax sparing provision of Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, such dividends declared to LGCI are subject to Philippine final withholding tax of 15%. 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. xxx xxx xxx (b) Intercorporate Dividends. A final withholding tax at a 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;" AScHCD Prescinding from the above-cited provisions, 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 corporations 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 stressing the rationale of the above principle, the Supreme Court in the case of Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, 204 SCRA 377, and later reiterated in Singapore Telecom International Pte. Ltd. vs. Commissioner of Internal Revenue, CTA Case No. 7406, that the preferential treatment of 15% 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. The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., G.R. No. 68375 dated April 15, 1988, has ruled that "While it may be true that the claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received . . . 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 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." aHIEcS Thus, the exemption from taxes of the dividends received by the country of domicile of the non-resident corporate stockholder is sufficient for the applicability of the 15% tax rate. In this case, a confirmation was issued by the Government of Barbados, Department of Inland Revenue that the dividends received by LGCI from the non-resident Philippine company will not be included in the assessable income of LGCI, in accordance with the provisions of the Income Tax Act, Cap. 73 Section 9 L (iii). SUCH BEING THE CASE, this Office holds that the cash dividends, to the extent of 15% of US$13,000,000.00 per CECWEC's Secretary's Certificate dated January 16, 2012, to be paid by CECWEC to a non-resident foreign corporation domiciled in Barbados, LGCI, on or before January 31, 2012, are subject to the 15% final withholding tax as prescribed in Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling Nos. 304-11 dated August 15, 2011 and 057-12 dated February 9, 2012) 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