BIR Ruling No. 436-13

November 19, 2013 BIR RULING NO. 436-13 Section 28 (B) (5) (b) of the 1997 National Internal Revenue Code of 1997, as amended; BIR Ruling No. 630-12 Sycip Gorres Velayo & Co. 6750 Ayala Avenue, 1226 Makati City, Metro Manila, Philippines Attention: Atty. Jules E. Riego Principal, Tax Advisory and Advocacy Group Gentlemen : This refers to your letter dated April 14, 2011 requesting for the confirmation of your opinion that dividends payments of Philippine Seven Corporation ("PSC") to Philippine Chain Store (Labuan) Holdings, Inc. ("PCS Labuan"), a non-resident foreign corporation based in Labuan, Malaysia, are subject to the 15% preferential final withholding tax ("FWT") rate under Section 28 (B) (5) (b) of the National Internal Revenue Code (NIRC) of 1997, as amended. DCAHcT It is represented, that PCS Labuan is a nonresident foreign corporation incorporated in Labuan, Malaysia; that PCS Labuan is not registered either as a corporation or as a partnership in the Philippines as certified by the Securities and Exchange Commission (SEC); that as of August 27, 2010, PCS Labuan owns 162,451,721 common shares representing 56.9% of the outstanding capital stock of PSC (with TIN No. 000-390-189-000), a domestic corporation and franchisor of 7-Eleven convenience stores in the Philippines; that on July 29, 2010, the Board of Directors of PSC approved the declaration of dividends in the amount of five centavos (PHP0.05) per share payable on September 23, 2010; and that dividends received by PCS Labuan from PSC is not subject to any tax in Malaysia pursuant to Malaysian tax laws, specifically, under Sections 2 and 9 of the Labuan Business Activity Tax Act 1990 (LBATA) as evidenced by the duly authenticated Certification/Opinion of Janice Wong, a Chartered Accountant and Partner of Ernst and Young (EY) Tax Consultants-Malaysia. In support of your request, you submitted the following original documents: 1. Letter request dated August 30, 2012 signed by Ms. Chau Sau Lai, Partner of Ernst & Young Tax Consultants Sdn Bhd, requesting for certification from the Labuan Federal Territory of the Inland Revenue Board (IRB) of Malaysia that the Labuan Business Activity Tax Act, 1990 (LBATA) is still effective; and 2.Letter dated September 20, 2012 issued by Mr. Zabidi Abd Rashid, Branch Director, Labuan Federal Territory of the IRB of Malaysia. In reply please be informed the Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997, as amended, provides as follows: " Sec. 28.Rates of Income Tax on Foreign Corporations . (A) . . . (B)Tax on Nonresident Foreign Corporation : (1) . . . (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 nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the 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 percent (15%) tax on dividends ;" (emphasis supplied) DcHSEa Under the said provision, if the country of domicile of the recipient corporation, in this case, Malaysia, allows as credit against the tax imposable by it an amount equivalent 15% of the dividends remitted to corporations domiciled therein, the dividends so remitted are subject to withholding tax at the rate of 15%. In addition, Malaysian Tax Law, specifically Section 2 in relation to Section 9 of the Labuan Business Tax Activity (LBTA) provides: "2.. . . Labuan non-trading activity means an activity relating to the holding of investments in securities, stock, shares, loons, deposits or any other properties by a Labuan entity on its own behalf; 9.Notwithstanding Section 3, a Labuan entity carrying on a Labuan business activity which is a Labuan non-trading activity for the basis period for a year of assessment shall not be charged to tax for that year of assessment." Under the afore-mentioned provisions, a Labuan holding company like PCS Labuan, is not subject to tax in Malaysia on income earned from holding of investments in securities, stock or shares. In the case of CIR vs. Wander Philippines, Inc. (160 SCRA 573), which involves a similar issue, the Supreme Court held that: " While it may be true that claims for refund are constructed 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 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 Bureau of Internal Revenue (BIR) had previously ruled in BIR Ruling No. 630-12 dated November 22, 2012 that: . . . 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%). IcCEDA This Office, guided by the doctrine laid down by the Supreme Court as well as the cited BIR Ruling hereby confirms that the cash dividends declared by PSC on July 29, 2010 and which shall be paid to PCS Labuan, a company organized and existing under the laws of Labuan, Malaysia, by PSC, a domestic corporation, are subject to 15% final withholding tax provided 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 herein 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