DA ITAD BIR Ruling No. 097-06

August 25, 2006 DA ITAD BIR RULING NO. 097-06 Section 28 (B) (5) (b) NIRC of 1997; BIR Ruling No. ITAD 88-04 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Philippines Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated February 10, 2006, on behalf of your client Hemisphere Leo Burnett, Inc . (HLBI), requesting confirmation of your opinion that the dividends to be paid to Leo Burnet Worldwide, Inc . (LBWI) by HLBI 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). It is represented that LBWI is a nonresident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office at Corporation Trust Center, 1209 Orange Center, Wilmington, County of New Castle, 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 December 5, 2005; that HLBI is corporation organized and existing under the laws of the Philippines with principal office at 24/F Tower 2, The Enterprise Center, 6766 Ayala Avenue, Makati City. It is further represented that LBWI holds Fifteen Thousand (15,000) common shares which represents 30% of the outstanding capital stock of HLBI as of January 10, 2006; that HLBI has an authorized capital stock of One Million Pesos (PhP1,000,000.00) divided into One Hundred Thousand (100,000) common shares with a par value of Ten Pesos (PhP10.00) per share; that on December 22, 2005, the Board of Directors of HLBI resolved and approved the declaration of cash dividends in the total amount of One Hundred Million Pesos (PhP100,000,000.00), to be distributed among stockholders of record as of December 31, 2004, pro rata to their respective shareholdings in HLBI as of December 31, 2004, payable as soon as possible and not later that April 28, 2006; 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 NIRC of 1997, as amended, 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;" AICEDc xxx xxx xxx" Pursuant to Section 28(B)(5)(b), dividends to be paid by HLBI to LBWI, are subject to 15 percent Philippine income tax if the latter's country of domicile, USA, shall allow LBWI 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%. 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 LBWI 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 LBWI on the dividends received from HLBI; (2) an authenticated copy of the income tax return of LBWI 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 Philippine. 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 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. SCIacA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service