BIR Ruling No. 462-12

July 17, 2012 BIR RULING NO. 462-12 Sec. 28 (B) (5) (b); 057-12 CE Casecnan Water and Energy Company, Inc. 24th Floor, 6750 Ayala Avenue Makati City Attention: Mr. Joseph L. Sullivan President Gentlemen : This refers to your letter dated November 24, 2011 stating that CE Casecnan Water and Energy Company, Inc. (CE Casecnan) is a corporation organized and existing under the laws of the Philippine with principal place of business at the Municipality of Pantabangan, Province of Nueva Ecija; that CE Casecnan was formed in September 1994 to design, develop, construct, erect, assemble, commission, finance, own and operate a combined irrigation and hydroelectric power generation project and related facilities for the conversion into electricity of water provided by and under contract with the National Irrigation Administration (NIA) with a rated capacity of 150 megawatts and for the supply of water for agricultural purposes to the NIA located in the Nueva Ecija and Nueva Vizcaya provinces in the island of Luzon in the Republic of the Philippines; that on the other hand, CE Casecnan Ltd. (CEL) is a company organized and existing under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM11 Bermuda; that it is an exempted company as certified by the Registrar of Companies in its August 15, 1994 Certificate of Incorporation pursuant to Section 14 of the Bermuda Companies Act of 1981; that CEL is not registered with the Securities and Exchange Commission (SEC) as a foreign corporation engaged in trade or business in the Philippines as evidenced by a Certificate of Non-Registration issued by the latter on September 12, 2011, that CEL owns 15% of the total issued and outstanding shares of stock of CE Casecnan; that on November 15, 2011, CE Casecnan declared cash dividends as supported by a resolution of the Board of Directors authorizing the same to be paid on or before November 30, 2011; and that on September 28, 2010, the Ministry of Finance of the Government of Bermuda issued a Certification that Bermuda is not an income tax jurisdiction and persons residing therein are not subject to income tax. Based on the foregoing representations, you now request confirmation of your opinion that the dividends to be remitted by CE Casecnan to CEL are subject to the 15% final withholding tax pursuant to Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. In support of your request, you have submitted the following documents, to wit: 1. Original Consularized Certificate of Incorporation issued by the Registrar of Companies in Bermuda certifying CEL as an exempt company pursuant to Section 14 of the Companies Act of 1981 and the Exempted Undertaking Tax Protection Act of 1966 dated August 15, 1994; 2. Certificate of Compliance of CEL issued by the Registrar of Companies in Bermuda dated September 9, 2010; EScaIT 3. Original Consularized Assurance issued by the Minister of Finance of Bermuda to CEL that imposition of taxes shall not be applicable to CEL under the Exempted Undertakings Tax Protection Act dated November 29, 1994; 4. Original Consularized Letter from the Office of the Tax Commission advising that Bermuda does not impose income tax; 5. Original Certificate of Non-registration of CEL issued by the SEC; 6. Original Board Resolution of CE Casecnan dated November 15, 2011 declaring the distribution of cash dividends to its stockholders, which includes the share of CEL; 7. Special Power of Attorney authorizing CE Casecnan to prepare and file this request for ruling on behalf of CEL and Certification authorizing Joseph L. Sullivan to file this request for ruling for CE Casecnan; 8. Certified true copy of Amended Articles of Incorporation and By-Laws of CE Casecnan; 9. Certified true copy of BIR Certificate of Registration of CE Casecnan; 10. Certified true copy of General Information Sheet for 2011. In reply thereto, please be informed that Section 28 (B) (5) (b) of the Tax Code of 1997 provides that EACIcH "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 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;" DaAISH 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 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%). In other words, the only condition for the application of the tax sparing credit is that the country-domicile of the recipient corporation allows a credit against the tax due from non-resident foreign corporations. 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 tax 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. IcESDA The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., 160 SCRA 573 (1988) has ruled that "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 . . . 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." Thus, the exemption from taxes by the country of domicile of the non-resident corporate stockholder on the dividends received is sufficient for the applicability of the 15% tax rate. In this case, the Company has received a written undertaking from the Minister of Finance in Bermuda under the Exempted Undertaking Tax Protection Act of 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits, income, gain or appreciation on any capital asset, or any tax in the nature of estate duty or inheritance tax, such tax will not be applicable to CE Casecnan Ltd. or any of its operations until March 28, 2016. The undertaking does not, however, prevent the imposition of taxes on any person ordinarily resident in Bermuda or any company in respect of its ownership of real property or leasehold interests in Bermuda. Moreover, the Minister of Finance of the Government of Bermuda issued a Certification that Bermuda is not an Income Tax jurisdiction and persons residing therein are not subject to income tax. (BIR Ruling No. 057-12 dated February 9, 2012) AISHcD SUCH BEING THE CASE, this Office holds that dividends to be paid by CE Casecnan to a non-resident foreign corporation domiciled in Bermuda, CEL, on or before November 30, 2011, are subject to the 15% final withholding tax as prescribed in Section 28 (B) (5) (b) of the Tax Code of 1997. (BIR Ruling Nos. 304-11 dated August 15, 2011; 057-12 dated February 9, 2012) It must be emphasized, however, that in line with Revenue Memorandum Circular (RMC) No. 80-91, the preferential tax rate of 15% imposed under the said Section 28 (B) (5) (b) may be availed of only when the following documentation requirements are punctiliously complied with within a reasonable time: a) to show that the dividends received by CEL from CE Casecnan were not among the items considered in arriving at the income tax due from CEL; b) to present the income tax return of CEL, for the taxable year when the subject dividends were received; and c) to submit any authenticated document showing that the Government of Bermuda did not impose any tax on the subject dividends. Otherwise, the general tax rate of 35% shall be applied. (BIR Ruling No. 368-11 dated October 5, 2011) 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. ETDHSa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue