BIR Ruling No. 434-11

November 9, 2011 BIR RULING NO. 434-11 Section 28 (B) (5) (b) NIRC; BIR Ruling No. 208-89; BIR Ruling No. DA-233-99; BIR Ruling No. DA-296-06; BIR Ruling No. DA-567-06 Punongbayan & Araullo 20th Floor, Tower I, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Ms. Lina P. Figueroa Principal Tax Advisory and Compliance Gentlemen : This refers to your letter dated March 10, 2008, received by this Office by way of Indorsement from the International Tax Affairs Division (ITAD) dated October 9, 2009, requesting on behalf of your client, Laguna Electronics, Incorporated, a ruling on the imposition of withholding tax on dividend payments to a non-resident foreign corporation domiciled and registered in Hong Kong, pursuant to Section 28 (B) (5) (b) of the 1997 Tax Code, as amended. The facts, as you represent, are as follows: Laguna Electronics, Incorporated (LEI) is a resident corporation registered with the Bureau of Internal Revenue (BIR) under Taxpayer Identification No. 002-076-138-000 with business address at 124 North Science Avenue, SEPZ, Laguna Technopark, Bian, Laguna. LEI is registered with PEZA under Registration No. 92-02 as a Manufacturing Export Enterprise. LEI is a corporation which is owned in majority (99.98%) by Tsukiden Hong Kong, Limited (THK), a Hong Kong based company with business address at Flat Rm. 2, 5/F Sai Wan Ho Plaza, 68 Shau Kei Wan Road, Hong Kong. On September 6, 2007, LEI's Board of Directors unanimously approved a Resolution declaring a cash dividend of Twenty-five Million (P25,000,000.00) out of the retained earnings of the Corporation. By virtue of said resolution, cash dividends were paid to the following stockholders: HcTEaA Name of Stockholder Shareholdings Percent Amt. of Cash Dividend Tsukiden Hong Kong Ltd. P84,454,900.00 99.980% P24,966,000.00 Edgardo Etac 2,400.00 0.003% 700.00 Keisuke Ito 2,400.00 0.003% 700.00 Junichi Ito 2,400.00 0.003% 700.00 Kazuma Hanzawa 2,400.00 0.003% 700.00 P25,000,000.00 ============ Resident stockholders were imposed with 10% tax rate, non-resident alien individuals with 20% and the non-resident corporation was imposed with 15% tax based on Section 28 (B) (5) (b) of the Tax Code. The withheld taxes were consequently remitted to the Bureau. You now request confirmation that the dividends paid by LEI to THK are subject to Philippine income withholding tax at the rate of 15% under Section 28 (B) (5) (b) of the Tax Code considering that under the laws of Hong Kong, no withholding tax is being imposed on dividends declared and paid by Hong Kong to its stockholders, resident or non-resident. In reply, please be informed that Section 28 (B) (5) (b) of the 1997 Tax Code, as amended, provides the rule for the tax treatment of intercorporate dividends received by non-resident foreign corporations, to wit: "(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 nonresident foreign Corporation is domiciled, shall allow a credit against the tax due from nonresident 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 (15%) tax on dividends;" AcEIHC Based on the foregoing, 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. From the documents submitted, Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are generally taxable in Hong Kong. Conversely, profits sourced elsewhere are not subject to Hong Kong Profits Tax. Accordingly, under current tax laws and regulations of Hong Kong, dividends to be received by a resident of Hong Kong, such as THK, from Philippine companies as foreign source income are not subject to Hong Kong Profits Tax, and the Inland Revenue Department of the Government of the Hong Kong Special Administrative Region treats all dividends received by residents of Hong Kong from foreign sources as non-taxable under Hong Kong Laws. In this case, the Inland Revenue Department confirmed in its letter dated September 22, 2009 that dividend income of THK has not been assessed under Hong Kong Profits Tax. 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) . In BIR Ruling No. DA-567-06 dated 20 September 2006 , this Office confirmed that the foregoing rule applies specifically to a company domiciled in Hong Kong, as we stated, thus: "It appearing from the supporting documents that you submitted, i.e. , a photocopy of the book Asia Pacific Taxation, 1995 Edition, KPMG International Tax Services, p. 89, stating that dividends (both foreign and Hong Kong source) are not subject to Profits Tax and a letter-confirmation from UHY Tai Kong CPA Limited, 21/F China-Chem Tower, Connaught Road, Central Hong Kong, that the HK Inland Revenue Department treats all dividends as non-taxable and that Hong Kong Profits Tax rates for year of assessment 2005/06 are 17.5% (for corporations) and 16% (for unincorporated businesses), the dividends declared and/or will be declared by Technopaq, Inc. to Power Best Properties, Inc. are not subject to income tax on dividends received from foreign sources under the Hong Kong Laws , this Office hereby confirms that cash dividends that will be paid by Technopaq, Inc. to Power Best Properties, Inc., shall be subject to a 15% withholding tax pursuant to Section 28(B)(5)(b) of the Tax Code of 1997, as amended. (Emphasis supplied)" cEaCTS Furthermore, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., 160 SCRA 573 (1988) , the Supreme Court ruled that an exemption from taxes by the country of domicile of the non-resident corporate stockholder on dividends received from Philippine sources is sufficient basis for the applicability of the 15% tax rate, viz. : "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. (Emphasis supplied) The ruling in the Wander Philippines case was reiterated in the case of Caltex (Philippines), Inc. vs. Commissioner of Internal Revenue, CTA Case No. 4986 dated 6 October 1995 . Based on the foregoing, this Office hereby holds and confirms your opinion that, under Section 28 (B) (5) (b) of the Tax Code, and considering that Hong Kong does not tax dividends derived by their residents from Philippine sources, the dividends that THK (a company domiciled in Hong Kong) will derive from its shareholdings in LEI are subject to preferential Philippine income tax at the rate of 15% of the gross amount of the dividends. This ruling is being issued on the basis of the foregoing facts as presented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue