BIR Ruling No. 559-12

September 6, 2012 BIR RULING NO. 559-12 Section 28 (B) (5) (b); BIR Ruling No. 304-2011; BIR Ruling No. 421-2011; BIR Ruling No. 439-2011 Manabat Sanagustin & Co. The KPMG Center, 9/F 6787 Ayala Avenue Makati City 1226 Attention: Ma. Georgina J. Soberano Principal, Tax Gentlemen : This refers to your letter dated October 20, 2011 requesting, on behalf of your client LaPrairie Group Contractors International Ltd. ("LGCI") , confirmation that the distribution and payment of 15% of the US$10,000,000.00 cash dividends received by LGCI from CE Casecnan Water and Energy Co. Inc. ("CECWEC") based on its Board of Directors resolution on 14 October 2011 declaring cash dividends to the stockholders of record as of 14 October 2011, payable on or before 31 October 2011, 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. cACHSE It is represented that LGCI is a non-resident foreign corporation incorporated under the laws of Barbados, with registered business address at the 2nd Floor, Building #2, Chelston Park, Collymore Rock, St. Michael, Barbados; that it is neither registered with Philippine Securities and Exchange Commission (SEC) nor doing business in the Philippines; that LGCI holds a total of 115,074 common shares, with par value of Php1.00 each, or a total of PhP115,074.00 in CECWEC, a domestic corporation with business office address at the 24th Floor, 6750 Building, Ayala Avenue, Makati City, Philippines; that LGCI has an equivalent to a fifteen percent (15%) shareholding in CECWEC; that in the special meeting of the Board of Directors of CECWEC held on 14 October 2011, the Board resolved that of the cash dividends in the amount of USD10,000,000.00 to be distributed, the equivalent of 15% thereof or USD1,500,000.00 will be distributed and paid to LGCI on or before 31 October 2011; and that a certification from the tax authorities in Barbados state that dividends received by LGCI from the non-resident Philippine company will not be included in the assessable income of the company. It is further represented that on 14 October 2011, the Board of Directors declared the distribution and payment of 15% of the US$10,000,000.00 cash dividends received by LGCI from CECWEC payable on or before 31 October 2011. Based on the foregoing, you now request for the confirmation of your opinion that the distribution and payment of 15% of the US$10,000,000.00 cash dividends received by LGCI from CECWEC based on the Board of Directors resolution on 14 October 2011 declaring cash dividends to the stockholders of record as of 14 October 2011, payable on or before 31 October 2011, are subject to the preferential rate of 15% pursuant to Section 28 (B) (5) (b) of the 1997 Tax Code, as amended. In further support thereof, you likewise point out that under Division E Section 9 (1) (l) (iii) of the Income Tax Act of Barbados, in calculating the assessable income of a person in respect of income year 2007 and subsequent income years, amounts received by a resident company registered in Barbados, as dividends, other than preference dividends, from a non-resident company when the Barbados resident is a shareholder representing at least 10 percent of the capital of the non-resident company and such a shareholding be not held solely for the purpose of the portfolio investments, are not included in assessable income; and therefore, not subject to tax. ESCacI In support of your request, you have submitted the following documents: 1) Photocopy of the BIR Ruling No. 304-2011 dated 15 August 2011 confirming that the cash dividends 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. 2) Certificate of Non-Registration of Corporation issued by the Philippine Securities and Exchange Commission (SEC) dated 10 December 2010; 3) Articles of Incorporation of LGCI; 4) LGCI's Certificate of Residency issued by the Commissioner of Inland Revenue, Island of Barbados; 5) Income Tax Act of Barbados; 6) Copy of Stock Certificate No. 15 dated 13 November 1995 evidencing the fifteen percent (15%) shareholdings of LGCI in CECWEC; 7) Certification from the Barbadian authorities that dividends received by a resident Barbadian corporation are not subject to tax in Barbados; 8) Special Power of Attorney in favor of KPMG Manabat Sanagustin & Co. as authorized representative of LGCI; 9) Secretary's Certificate certifying that a Board Meeting was held on 14 October 2011 and resolved that cash dividends will be distributed and paid on or before 31 October 2011; and IHEDAT 10) Verification & Certification that the photocopies attached to the letter request for ruling filed on 21 October 2011 are faithful reproductions of the original copies previously filed with the Law Division, Bureau of Internal Revenue. 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. This tax treatment was previously applied to a case involving dividends paid by a domestic corporation to a company incorporated under the laws of Hong Kong, wherein it was held that 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. aTcIAS This Office previously ruled that, where the country of the non-resident recipient of the dividends does not impose any tax on dividends received from the domestic company, the dividends will be subject to final withholding tax at the rate of 15%. 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 this case, the Department of Inland Revenue of the Government of Barbados has issued a Certification that LGCI 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 (1) (l) (iii), which states that: "Calculation of Assessable Income: Amounts not Included 9(1) In calculating the assessable income of a person for an income year, the following amounts shall not be included, namely (a) . . . xxx xxx xxx (l)(i) . . . (ii) . . . (iii) in respect of income year 2007 and subsequent income years, amounts received by a resident company registered in Barbados as dividends, other than preference dividends, from a non-resident company when the Barbados resident is a shareholder representing at least 10 percent of the capital of the non-resident company and such shareholding is not held solely for the purpose of portfolio investments;" HDATCc Hence, considering that LGCI holds more than 10% of the capital of the non-resident company, the dividends received by it, as a company registered in Barbados, shall not be included in calculating the assessable income under the Income Tax Act of Barbados. 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 the distribution and payment of 15% of the US$10,000,000.00 cash dividends received by LaPrairie Group Contractors International Ltd. from CE Casecnan Water and Energy Co. Inc. based on its Board of Directors resolution on 14 October 2011 declaring cash dividends to the stockholders of record as of 14 October 2011, payable on or before 31 October 2011, are subject to 15% final withholding tax imposed under Section 28 (B) (5) (b) of the Tax Code of 1997, as amended. (BIR Ruling No. 304-2011 dated August 15, 2011; BIR Ruling No. 421-2011 dated November 4, 2011; and BIR Ruling No. 439-2011 dated November 9, 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