DA ITAD BIR Ruling No. 080-08

October 29, 2008 DA ITAD BIR RULING NO. 080-08 Section 28 (B) (5) (b) NIRC of 1997; BIR Ruling No. ITAD 88-04 Manabat Delgado Amper & Co. 3rd-6th Floor, Salamin Building 197 Salcedo St., Legaspi Village Makati City 1229 Philippines Attention: Atty. Domingo A. Lagundi, Jr. Atty. Fredieric B. Landicho Gentlemen : This refers to your letter dated 18 June 2007, on behalf of your client Becton Dickinson Philippines, Inc. (Becton Philippines), requesting confirmation of your opinion that the cash dividends to be paid by Becton Philippines to Becton Dickinson Infusion Therapy Systems, Inc. (Becton US) are subject to income tax at the rate of fifteen percent (15%) pursuant to Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997 (NIRC of 1997), as amended, in relation to the relevant provisions of the Philippines-United States of America tax treaty and related BIR rulings. CIETDc It is represented that Becton US is a US corporation and is a resident of the United States of America for purposes of US Taxation as certified by the Field Director, Philadelphia Accounts Management Center, Internal Revenue Service of the Department of Treasury of the United States of America; that it is not registered either as a corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission dated 29 March 2007; that Becton Philippines is a wholly owned subsidiary of Becton US, and a corporation organized and existing under the laws of the Philippines with principal office at 27th Floor, PB Com Tower, 6795 Ayala Avenue corner V.A. Rufino Street, 1226 Makati City, Philippines; that it is presently engaged in the distribution of a broad range of medical products and diagnostic item for use of healthcare professionals, medical research institutions and the general public. It is further represented that Becton US held Four Million Nine Hundred Sixty Thousand Eight Hundred Ninety-Three (4,960,893) shares which represents 99.99% of the outstanding capital stock of Becton Philippines as of 22 February 2007; that on 22 February 2007, the Board of Directors of Becton Philippines resolved to declare dividends in the amount of One Hundred Sixty Million Seven Hundred Forty-Five Thousand Eight Hundred Sixty-Seven Pesos (P160,745,867.00) to be taken out of Becton US' unrestricted retained earnings as of 30 September 2006, in favor of all stockholders of record of Becton Philippines in proportion to the shares respectively held by them, which cash dividends shall be paid no later than 31 December 2007; and that the transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer involved. In reply, please be informed that Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997, as amended, applies to intercorporate dividends received by a nonresident foreign corporation such as Becton US. It provides: "Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (B) Tax Nonresident Foreign Corporations. 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 nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippine 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 (15%), which represents the difference between the regular income tax of thirty percent (30%) and the fifteen percent (15%) tax on dividends; 1 TACEDI xxx xxx xxx" Pursuant to Section 28 (B) (5) (b), dividends to be paid by Becton Philippines to Becton US are subject to 15 percent Philippine income tax if the latter's country of domicile, USA, shall allow Becton US a 20 percent deemed paid tax credit against its USA income tax due on such dividends. The Supreme Court (SC), on two separate occasions, had ruled on the applicability of the 15 percent income tax on dividends under then Section 24 (b) (1), which was similarly worded as Section 28 (B) (5) (b) as aforequoted, first, in Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals (G.R. No. L-68375, April 15, 1988) and second, in Commissioner of Internal Revenue vs. Procter & Gamble Philippines Manufacturing Corporation (G.R. No. 66838, December 2, 1991). In the first SC decision, Wander Philippines, Inc. (Wander) a domestic corporation, remitted dividends to Glaro S.A. Ltd. (Glaro), a nonresident foreign corporation domiciled in Switzerland. Under Swiss law, dividends derived by Glaro from sources outside Switzerland are exempt from Swiss income tax. Given this, the SC ruled that the subject dividends were subject to 15 percent income tax by reason that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the required (minimum) 20 percent deemed paid tax credit but, also, full tax credit on such dividends. In the second SC decision, Procter & Gamble Philippines Manufacturing Corporation (P&G Philippines), a domestic corporation, remitted dividends to Procter and Gamble Company, Inc. (P&G USA), a nonresident foreign corporation domiciled in the USA. But unlike in the Wander case where the Swiss law exempts dividends derived by its residents from sources outside Switzerland, in this case, the applicable US law (Section 902, US Tax Code) provides that dividends derived by P&G USA from sources outside the US are allowed US tax credits equivalent to the sum of the Philippine income tax actually paid on the dividend remittances to P&G USA and the deemed paid tax credit proportionate to the corporate income tax actually paid by P&G Philippines. The SC declared that Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC. Further, in deciding on the issue of whether the reduced 15% tax rate is applicable based on Section 24 (b) (1) of the NIRC, the SC went on to say that ". . . Section 24 (b) (1), NIRC, does not in fact require that the deemed paid tax credit shall have actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the USA " shall allow a credit against the tax dues from [P&G-USA] for taxes deemed to have been paid in the Philippines . . .". Given this, the SC pronounced that the subject dividends were subject to the reduce income tax rate of 15%. aEcADH Therefore, in conformity with the aforementioned Supreme Court decision on the Procter & Gamble case, your opinion that the dividends to be remitted by Becton Philippines to Becton US are subject to the preferential tax rate of 15 percent pursuant to the provisions of the NIRC of 1997, as amended, is hereby confirmed, subject to compliance with the requirements set forth under Revenue Memorandum Circular No. 80-91 as follows: (1) an authenticated certification issued by the USA tax authority showing the actual amount credited by the USA Internal Revenue Service against the income tax due from Becton US on the dividends received from Becton Philippines; (2) an authenticated copy of the income tax return of Becton US for the taxable year when the dividends were received; (3) an authenticated document issued by the USA tax authority showing that it credited 20% of the tax deemed paid in the Philippines. Failure to submit these documents within a reasonable time would result in the imposition of deficiency assessment for the twenty (20) percentage points differential. (BIR Ruling No. ITAD-88-04 dated 20 August 2004) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Footnotes 1. As amended by R.A. 9937 (May 24, 2005).