BIR Ruling No. 429-12

June 25, 2012 BIR RULING NO. 429-12 Section 28 (B) (5) of the Tax Code of 1997; BIR Ruling No. 104-12; BIR Ruling No. 304-11; BIR Ruling No. 421-11; BIR Ruling No. 439-11 Manabat Sanagustin & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City Attention: Atty. Ma. Georgina J. Soberano Principal/Tax Gentlemen : This refers to your letter dated April 17, 2012 stating that your client, LaPrairie Group Contractors International Ltd. (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; that it is neither registered nor doing business in the Philippines; that LGCI holds a total of 115,074 common shares, with par value of Php1.00 each, or a total of Php115,074.00 in CE Casecnan Water and Energy Co., Inc. (CECWEC); that this is equivalent to a fifteen percent (15%) shareholding in CECWEC, a domestic corporation with business address at the 24th Floor, 6750 Building, Ayala Avenue, Makati City, Philippines; that in a special meeting of the Board of Directors of CECWEC held on April 2, 2012, the Board resolved that of the cash dividends in the amount of US$7,500,000.00 to be distributed, the equivalent of 15% thereof or US$1,125,000.00 will be distributed and paid to LGCI on or before April 30, 2012; and that 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. Based on the foregoing representations, you now request confirmation that cash dividends to be received by LGCI from CECWEC are subject to the 15% preferential final withholding tax rate prescribed in Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. 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 Corporation. (B) Tax on Nonresident Foreign Corporation. xxx xxx xxx (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. CDaTAI 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%) 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; xxx xxx xxx" In stressing the rationale of the above-mentioned provisions, the Supreme Court in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., G.R. No. L-68375 dated April 15, 1998, 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." Thus, in BIR Ruling No. 304-11 dated August 15, 2011, this Office ruled that "In this case, the Department of Inland Revenue of the Government of Barbados has issued a Certification that LGCI will not be subject to tax on dividends received from its non-resident affiliate in accordance with the provisions of the Income Tax Act Cap 73 Section 9 (1) (l) (iii), which states that: DEICTS 'Calculation of Assessable Income: Amounts not Included 9.(1) In calculating the assessable income of a person for an income year, the following amounts shall not be included, namely (a) . . . xxx xxx xxx (l) (i) . . . . (ii) . . . (iii) 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 shareholding is not held solely for the purpose of portfolio investments;' Hence, considering that LGCI holds more than 10% of the capital of the non-resident company, the dividends received by it, as a company registered in Barbados, shall not be included in calculating the assessable income under the Income Tax Act of Barbados. In view of the foregoing and the fact that LGCI has been certified by the Barbadian Department of Inland Revenue that it will not be subject to tax on dividends received from its non-resident affiliate in accordance with the provisions of the Income Tax Act Cap 73 Section 9 (l) (iii), this Office hereby confirms your opinion that cash dividends to be received by LGCI from CECWEC on February 28, 2011 are subject to 15% final withholding tax imposed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended." SUCH BEING THE CASE, since the above-cited ruling is in all fours similar to the case at bar, this Office holds that the cash dividends to be received by LGCI from CECWEC on or before April 30, 2012 are subject to the 15% final withholding tax imposed under Section 28(B)(5)(b) of the Tax Code of 1997, as amended. 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. TSacCH Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue