DA ITAD BIR Ruling No. 084-08

October 31, 2008 DA ITAD BIR RULING NO. 084-08 Section 28 (B) (5) (b) of the NIRC of 1997; BIR Ruling No. DA-ITAD-033-06 Roxas De Los Reyes Laurel & Rosario Law Offices 19/F BDO Plaza, 8737 Paseo de Roxas Makati City 1226, Philippines Attention: Ms. Anna Melissa R. Lichaytoo Ms. Carmine Eliza T. Serrano Gentlemen : This refers to your application for tax treaty relief dated January 13, 2006, on behalf of your client, PerkinElmer Holdings, Inc. (PE Holdings), formerly known as EG&G Holdings, Inc., requesting confirmation of your opinion that the dividends payable by Perkin-Elmer Instruments (Philippines) Corporation (PE Philippines) to PE Holdings may be subject to the preferential tax rate provided under the Philippines-United States of America (Philippines-US) tax treaty in relation to the National Internal Revenue Code of 1997 (NIRC of 1997). AEcTCD It is represented that PE Holdings is a nonresident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office at 45 William Street, Wellesley, MA 02181 USA; 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 January 11, 2006; that PE Philippines is a domestic corporation with office address at 10/F Magnificent Mile Building, San Miguel Avenue, Ortigas Avenue, Pasig City. It is further represented that as of December 15, 2005, PE Holdings owns 99.9% of PE Philippines outstanding shares, amounting to Five Million Two Hundred Ninety Nine Thousand Five Hundred Pesos (PhP5,299,500.00), as shown in the Certification issued by the Corporate Secretary of PE Philippines dated January 13, 2006; that on November 24, 2005 the Board of Directors of PE Philippines declared cash dividends to all shareholders of record as of December 7, 2005 in the amount of Four Million Three Hundred Forty One Thousand Nine Hundred Fifty Six Pesos and 87 Centavos (PhP4,341,956.87), to be taken from PE Philippines' unrestricted earnings as of December 31, 2004 and payable to all shareholders of record on December 15, 2005; and that the issue/s or 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/s involved. In reply, please be informed that Section 28 (B) (5) (b), of the National Internal Revenue Code (NIRC) of 1997, as amended, provides: Section 28. Rates of Income Tax on Foreign Corporations . xxx xxx xxx (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 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 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%), tax 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;" EaCDAT "xxx xxx xxx" Pursuant to Section 28 (B) (5) (b) above, dividends to be paid by PE Philippines to PE Holdings, are subject to 15 percent Philippine income tax if the latter's country of domicile, USA, shall allow PE Holdings 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 reduced income tax rate of 15%. ISHaTA Therefore, in conformity with the aforementioned Supreme Court decision on the Procter & Gamble case, your opinion that the dividends to be remitted by your company to PE Holdings are subject to the preferential tax rate of 15 percent under Section 28 (B) (5) (b) and not 32 percent under Section 28 (B) (1) 1 of the NIRC, 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 US tax authority showing the actual amount credited by the US Internal Revenue Service against the income tax due from PE Holdings on the dividends received from PE Philippines; (2) an authenticated copy of the income tax return of PE Holdings for the taxable year when the dividends were received; (3) an authenticated document issued by the US 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 August 20, 2004) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall 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. "(1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs 5 (c): Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%)." HCITcA