BIR Ruling No. 494-12

July 31, 2012 BIR RULING NO. 494-12 Section 28 (B) (5) (b), NIRC; BIR Ruling No. 008-00; BIR Ruling No. 304-2011 CE Casecnan Water and Energy Company, Inc. 24th Floor, 6750 Ayala Avenue, Makati, Metro Manila Attention: Mr. Joseph L. Sullivan President Gentlemen : This refers to your letter dated July 18, 2011, requesting, confirmation that cash dividends remitted by CE Casecnan Water and Energy Company, Inc. ("CE Casecnan") to CE Casecnan Ltd. ("CEL") are subject to the preferential fifteen percent (15%) final withholding tax (FWT) rate prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. Documents submitted disclose that CE Casecnan, with TIN 004-500-931-000, is a duly organized domestic corporation registered with the Securities and Exchange Commission (SEC) in September 1994 with business office address at the 24th Floor, 6750 Building, Ayala Avenue, Makati City, Philippines; that the company was formed to primarily 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 150MW and for the supply of water for agricultural purposes to the NIA located in Nueva Ecija and Nueva Vizcaya provinces of Luzon; that CEL is a company incorporated under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM11 Bermuda; that CEL 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 was issued a Certificate of Compliance by the Bermuda Ministry of Finance on September 9, 2010; that CEL was issued by the Bermuda Minister of Finance a Certificate of Assurance dated November 29, 1994 as to non-imposition of tax; that the Office of the Tax Commissioner of Bermuda issued a notice dated September 28, 2010 that persons residing in Bermuda are not subject to income tax in Bermuda; that CEL has been certified by the SEC as a non-resident foreign corporation evidenced by the Certificate of Non-Registration of Company on April 8, 2011; that it owns 15% of the total issued and outstanding stock of CE Casecnan; that CE Casecnan declared cash dividends on July 11, 2011 in the amount of US$7,000,000.00 to its stockholders, including CEL, and which will be paid out no later than July 31, 2011; and that a certification from the Office of the Tax Commissioner of the Government of Bermuda state that "Bermuda is not an Income Tax jurisdiction. As such, persons residing in Bermuda are not subject to Income Tax in Bermuda". acIASE In reply, please be informed Section 28 (B) (5) (b) of the Tax Code of 1997, as amended, provides that "(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%), 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 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. The Supreme Court, in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., 160 SCRA 573 [1988] has ruled that exemption from taxes by the country of domicile of the non-resident corporate stockholder on the dividends received is sufficient basis for the applicability of the 15% tax rate. Thus: CcAITa "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." The ruling in the above case was reiterated in the case of Caltex (Philippines), Inc. v. Commissioner of Internal Revenue, CTA Case No. 4986 dated October 6, 1995, wherein it was held that the dividends remitted by a domestic corporation to a resident of Bermuda is subject to 15% withholding tax inasmuch as Bermuda does not impose any tax on dividends received by corporations domiciled therein, pursuant to The Exempted Undertaking Tax Protection Act of 1966. In line with the doctrine in foregoing jurisprudence, this Office ruled in BIR Ruling No. 008-00 dated January 5, 2000 that SGS Philippines, Inc. is subject to the preferential tax rate of 15% withholding tax on the dividends remitted to its non-resident foreign parent company, Societe Generale de Surveillance of Switzerland, as follows: "Similarly situated is the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. , No. L-68375 dated April 15, 1998 where the Supreme Court ruled ". . . since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed."" HETDAC Likewise, this Office had the occasion to apply the foregoing in BIR Ruling No. 304-2011 dated August 15, 2011, where the dividends received from a domestic corporation by a non-resident foreign corporation organized in Barbados are subject to the 15% final withholding tax since Barbadian tax laws does not impose tax on such dividends, thus: "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." In this case, Bermuda's Minister of Finance issued an Assurance to CEL pursuant to The Exempted Undertaking Tax Protection Act of 1966 that ". . . in the event that there being enacted in these Islands any legislation composing tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such shall not be applicable to CE CASECNAN LTD. . . . or to any of its operation or the shares, debentures or other obligations of the said Undertaking. . .". The Assurance issued to CEL is effective until March 28, 2016. Based on the foregoing and considering that CEL is enjoying tax exempt status pursuant to Bermuda's The Exempted Undertaking Tax Protection Act of 1966, as certified in the Tax Assurance Certificate issued by the Registrar of Companies for the Minister of Finance of Bermuda, this Office hereby confirms your opinion that dividends to be paid out no later than July 31, 2011 by CE Casecnan, a domestic corporation, to CEL, a non-resident foreign corporation domiciled in Bermuda, are subject to the 15% preferential withholding tax rate under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. ADEacC 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue