BIR Ruling No. 453-13

November 27, 2013 BIR RULING NO. 453-13 28 (B) (5) (B), NIRC; BIR Ruling No. 004-07; BIR Ruling No. 420-11; BIR Ruling No. 559-12; BIR Ruling No. 494-12; BIR Ruling No. 492-12 Manabat Sanagustin & Co., CPAs The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Attention: Atty. Manuel P. Salvador III Principal, Tax Gentlemen : This refers to your letter dated October 16, 2012 requesting on behalf of your client, Wyeth LLC ("Wyeth LLC") for confirmation of your opinion that the dividends that will be paid by Wyeth Philippines, Inc. ("Wyeth Philippines") to Wyeth LLC are subject to fifteen percent (15%) final withholding tax under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997, as amended. Background Wyeth LLC is a non-resident foreign corporation organized and existing under the laws of the United States of America, with principal office at Five Giralda Farms, Madison, New Jersey, 07940, United States of America. It is considered as a U.S. resident for purposes of U.S. taxation, as evidenced by a Certification from the U.S. Department of the Treasury-Internal Revenue Service. On the other hand, Wyeth Philippines is a domestic corporation registered with the SEC. Its principal office is located at 2236 Chino Roces Avenue, Makati City. Wyeth Philippines is presently engaged as a New Producer of Infant Formula, as evidenced by Certificate of Registration No. 2006-035 dated March 8, 2006 issued by the Board of Investments. This registration currently exists and has not been cancelled, as certified by the same agency under the Certification it issued on October 10, 2012. aCTADI On September 28, 2012, the Board of Directors of Wyeth Philippines declared a cash dividend of Php864.88 per share, or a total of Five Billion Two Hundred Seventy Nine Million Three Hundred Eighty Four Thousand Sixty Three and 28/100 Pesos (Php5,279,384,063.28) in favor of all stockholders of record as of close of business on September 25, 2012, which shall be payable on or before October 28, 2012. As of the date of declaration and payment of the cash dividends, Wyeth LLC owns One Million Five Hundred Seventy Four Thousand Four Hundred Fifty Three (1,574,453) Class A shares, and Four Million Five Hundred Twenty Nine Thousand Seven Hundred Twenty (4,529,720) Class B shares, representing 25.79303% and 74.20684%, respectively of the capital stock of Wyeth Philippines. As per Section 7 of the Articles of Incorporation of Wyeth Philippines, both Class A and B shares have the same voting rights and shall participate equally in the net earnings of the company. In reply, please be informed that Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, provides, to wit: "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. TcDAHS 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;" 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 of 1997 are subject to 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 percent (20%) [fifteen percent (15%) beginning January 1, 2009] of such dividend. The country of residence of the dividend recipient, Wyeth LLC, is the United States of America ("US"). The US Tax Code allows such a credit on the amount of taxes paid or accrued to any foreign country, as provided in Sections 901 and 902 of its US Internal Revenue Code, thus: TDcAIH "SEC. 901. Taxes of foreign countries and of possessions of United States . (a)Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of Section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under Sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under Section 26(b). (b)Amount allowed. Subject to the limitation of Section 904, the following amounts shall be allowed as the credit under subsection (a): (1)Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and xxx xxx xxx" "SEC. 902. Deemed Paid Credit Where Domestic Corporation Owns 10% or More of Voting Stock of Foreign Corporation . (a)Taxes Paid by Foreign Corporation Treated As Paid by Domestic Corporation For purposes of this subpart, a domestic corporation which owns 10 percent or more of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same proportion of such foreign corporation's post-1986 foreign income taxes as SHADEC (1)the amount of such dividends (determined without regard to section 78, bears to * (2)such foreign corporation's post-1986 undistributed earnings. xxx xxx xxx (c)Definitions and special rules. For purposes of this section xxx xxx xxx (4)Foreign income taxes (A)In general The term "foreign income taxes" means any income, war profits, or excess profits taxes paid by the foreign corporation to any foreign country or possession of the United States." In BIR Ruling No. 004-07 dated February 19, 2007, this Office ruled, as follows: "b.With respect to the cash dividends on the preferred shares of stock held by KO, on the other hand, the same should be subject to the fifteen percent (15%) final withholding tax under Section 28 (B) (5) (b) of the Tax Code, as amended by R.A. No. 9337, viz. : (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;" TIHDAa The tax on inter-corporate dividends is reduced by 20% from 35% to 15% subject to the above-mentioned condition. The tax deemed paid is adjusted to correspond to the decreasing corporate income tax rate. The law specifies that such tax credit for "taxes deemed paid in the Philippines", must, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the preferred 15% rate. (Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation, G.R. 66838, December 2, 1991) In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the US shall allow tax credit in favor of KO for "taxes deemed paid in the Philippines" against its US taxes. In the case of Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corp. (P & G) and Court of Tax Appeals (G.R. 66838, December 2, 1991) the Supreme Court further ruled that dividends paid to a US resident shall be subject to fifteen percent (15%) dividend tax rate, as follows: "It is important to note that Section 34(b) (1), NIRC, now Section 25(b)(5)(B) of the Tax Code, does not require that the US must give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividends tax waived by the Philippines, The NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines. aDSHIC In BIR Ruling No. 175-00, the BIR reiterated the findings of the Supreme Court in the case of Procter and Gamble Philippines Manufacturing Corp. vs. Comm. of Internal Revenue (G.R. No. 66838), saying that it "has confirmed that Section 901 of the United States Internal Revenue Code meets the 20% deemed tax credit requirement provided under then Section 25 (b) (5) (B) of the 1993 Tax Code [now Section 28 (B) (5) (b)]." In this connection, therefore, dividends distribution by CCBPI on the preferred shares of stock held by KO shall be subject to the fifteen percent (15%) final withholding tax under Section 28 (B) (5) (b) of the Tax Code." In view of the foregoing and the fact that Wyeth LLC is a corporation organized, existing and residing under the laws of the United States of America, a country which allows a credit against the tax due from the non-resident corporation taxes deemed to have been paid in the Philippines, as clearly provided in the US Tax Code, this Office hereby confirms your opinion that the cash dividends declared by Wyeth Philippines, Inc. on September 28, 2012 which are payable on or before October 28, 2012 to Wyeth LLC amounting to a total of Five Billion Two Hundred Seventy Nine Million Three Hundred Eighty Four Thousand Sixty Three and 28/100 Pesos (Php5,279,384,063.28) are subject to the fifteen percent (15%) final withholding tax as prescribed 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, as represented are different, then this ruling shall be considered null and void. cHATSI Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue