BIR Ruling No. 512-12

August 3, 2012 BIR RULING NO. 512-12 Section 28 (B) (5) (b) of the Tax Code of 1997, as amended; BIR Ruling No. 257-2012; BIR Ruling No. 256-2012; BIR Ruling No. 304-2011 CE Casecnan II, Inc. 24th Floor, 6750 Ayala Avenue Makati City 1226 Attention: Trinity S. Gatuz Director Gentlemen : This refers to your letter dated January 26, 2012 requesting the confirmation of your opinion that the cash dividends declared by CE CASECNAN II, INC. ("CE II") to CE CASECNAN LTD. ("CEL") on 17 January 2012, as evidenced by a resolution of the Board of Directors authorizing the same, to be paid out no later than fifteen days from actual receipt by CE II of its share in the dividends declared by CE Casecnan Water and Energy Company, Inc. during the Board Meeting held on 13 January 2012, are subject to the 15% preferential final withholding tax rate under Section 28 (B) (5) (b) of the National Internal Revenue Code ("Tax Code") of 1997, as amended, otherwise known as the "tax sparing credit". It is represented that CE II is a corporation duly organized and existing under the laws of the Philippines, with office address at 24th Floor, 6750 Building, Ayala Avenue, Makati City. CE II was formed in January 7, 2003 primarily to acquire, hold, own and use for investment, or otherwise, sell or dispose of properties of every kind and description and whenever situated, as to the extent permitted by law. CEL, on the other hand, is a company duly organized and existing under the laws of Bermuda with address at Clarendon House, 2 Church Street, Hamilton, HM11 Bermuda. It is a non-resident company as evidenced by a Certificate of Non-Registration issued by the Philippines Securities and Exchange Commission (SEC) dated September 12, 2011. It is 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. It owns 99.99% of the total issued and outstanding shares of stock CE II. HTCaAD Pursuant to its internal corporate policies, CE II regularly declares dividends to its stockholders. The remittance of dividends by CE II and its receipt by CEL is, therefore, a recurring transaction between the companies. On January 17, 2012, CE II declared cash dividends to CEL, as evidenced by a resolution of the Board of Directors authorizing the same, to be paid out no later than fifteen days from actual receipt by CE II of its share in the dividends declared by CE Casecnan Water and Energy Company, Inc. during the Board Meeting held on January 13, 2012 In support of your request, you have submitted the following documents: 1) Originally 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; EHACcT 3) Originally 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 Undertaking Tax Protection Act dated November 29, 1994; 4) Originally Consularized Letter from the Office of the Tax Commissioner advising that Bermuda does not impose income tax; 5) Original Certificate of Non-Registration of CEL issued by the SEC; 6) Original Board of Resolution of CE II, issued by CE II's Corporate Secretary dated January 17, 2012 declaring the distribution of dividends to its sole stockholder, CEL; 7) Original Special Power of Attorney (SPA) authorizing CE II to prepare and file this request for ruling on behalf of CEL and SPA authorizing Trinity S. Gatuz to file request for ruling for CE II; 8) Copy of Certificate of Incorporation, Articles of Incorporation and By-laws of CE II; AISHcD 9) Copy of BIR Certificate of Registration of CE II; and 10) Consularized copy of the letter of the Senior Tax Auditor of the Office of the Tax Commissioner of Bermuda is attached in the docket of BIR Ruling No. 257-2012 dated April 20, 2012; BIR Ruling No. 256-2012 dated April 20, 2012; and BIR Ruling No. 304-2011 dated August 15, 2011. 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." ASaTCE Under the said provision, 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 the 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 Philippines Manufacturing Corporation, 1 and later reiterated in Singapore Telecom International Pte. Ltd. vs. Commissioner of Internal Revenue, 2 that the preferential tax treatment 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. In the instant case, Bermuda does not impose any income tax. 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: EaHcDS "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." 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, CEL 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 assets, 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. TcDAHS Moreover, 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. SUCH BEING THE CASE, this Office holds that the cash dividends declared by CE CASECNAN II, INC. ("CE II") to CE CASECNAN LTD. ("CEL") on 17 January 2012, as evidenced by a resolution of the Board of Directors authorizing the same, to be paid out no later than fifteen days from actual receipt by CE II of its share in the dividends declared by CE Casecnan Water and Energy Company, Inc. during the Board Meeting held on 13 January 2012, are subject to the 15% final withholding tax as prescribed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling No. 257-2012 dated April 20, 2012; BIR Ruling No. 256-2012 dated April 20, 2012; and BIR Ruling No. 304-2011 dated August 15, 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. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. 204 SCRA 377. 2. CTA Case No. 7406.