BIR Ruling No. 511-11

December 20, 2011 BIR RULING NO. 511-11 Section 28 (B) (5) (b); BIR Ruling No. 208-98; BIR Ruling No. 368-2011 KPMG Manabat Sanagustin & Co., The KPMG Center, 9F 6787 Ayala Avenue, Makati City Attention: Mr. Herminigildo G. Murakami Principal, Tax & Corporate Services Gentlemen : This refers to your letter dated July 29, 2010 requesting on behalf of your client, HSBC Institutional Trust Services (Asia) ltd., (HSBC Trust) , for a confirmation of your opinion that the dividends paid by domestic companies to HSBC Trust, as trustee of the JF Philippine Fund are subject to the fifteen percent (15%) final withholding tax under section 28 (B) (5) (B) of the Tax Code of 1997, as amended. It is represented that HSBC Trust is a company incorporated in Hong Kong and registered as a trust company under the Trustee Ordinance of Hong Kong; that it is a trustee of several funds one of which is the JF Philippine Fund which was registered on July 18, 1979 pursuant to Section 104 of the Securities and Futures Ordinance and the Code on Unit Trust and Mutual Funds of Hong Kong; that as trustee of JF Philippine Fund, HSBC Trust invested in shares of stock of Philippine companies; that it holds legal title to the investments, as the investments are registered in HSBC Trust name, in particular "HSBC Fund Services A/C 006 JF Philippine Fund"; and that as such, HSBC Trust, as trustee of JF Philippine Fund, receives dividends from Philippine companies. It is also represented that Hong Kong, the country of domicile of HSBC Trust, operates on a territorial tax system wherein persons, including corporations, partnerships, trustees and bodies of persons carrying on any trade, profession or business in Hong Kong are chargeable to tax on all profits (excluding profits arising from the sale of capital assets) arising in or derived from Hong Kong from such trade, profession or business. Conversely, profits derived outside of Hong Kong are not subject to tax in Hong Kong. Considering that the dividends received by HSBC Trust from Philippine Corporations are profits derived from outside of Hong Kong these are therefore not subject to tax in Hong Kong. Section 14 of the Hong Kong Inland Revenue Ordinance provides: CaDSHE " Charge of profits tax (1) Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment at the standard rate on every person carrying on a trade , profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade , profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part." In reply, please be informed that section 28 (B) (5) (b) of the Tax Code, as amended by Republic Act No. 9337, provides that "(B) Tax on Non-Resident Foreign Corporation. "(5) Tax on Certain Incomes Received by a Non-Resident Foreign Corporation. "(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 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 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 above provision, dividends declared by a domestic corporation in favor of a nonresident foreign corporation domiciled in a country that allows a credit of 17% (after the year 1999) on such dividends are subject to the withholding tax rate of 15%. Several rulings of this Office consistently held that the same 15% rate applies even more if the country of the recipient non-resident foreign corporation exempts from tax the dividends declared by the domestic corporation. Moreover, this was clarified in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc., G.R. No. L-68375 dated April 15, 1998, where the Supreme Court ruled that ". . . since the Swiss Government does not impose any tax on the dividends to be received by the said corporation in the Philippines, the condition imposed under the abovementioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed." In applying the aforesaid section to a case involving dividends paid by a domestic corporation to a company incorporated under the laws of Hong Kong, dividends remitted to Bermuda Trust (Far East) Limited, a non-resident foreign corporation domiciled in Hong Kong are subject only to the 15% withholding tax. It is noted that HSBC Trust is formerly known as Bermuda Trust (Far East) Limited. In view of the foregoing, this Office hereby confirms your opinion that the cash dividends received by HSBC Trust, as trustee of JF Philippine Fund, from domestic corporations are subject to 15% final withholding tax under Section 28 (B) (5) (b) of the Tax Code. DIESHT 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