Sycip Salazar Hernandez and Gatmaitan

March 10, 2023 ITAD BIR RULING NO. 004-23 Section 28 (B) (5) (b), National Internal Revenue Code of 1997, as amended Sycip Salazar Hernandez and Gatmaitan Sycip Law Center 105 Paseo de Roxas 1226 Makati City Attention: AAA BBB CCC Gentlemen : This refers to your letters dated March 16, 2017, March 14, 2018 and March 14, 2019 requesting confirmation that dividends paid by ABS-CBN Corporation ("ABS-CBN'') to Mercury Media Holdings Finance I, Ltd. ("Mercury Media") are subject to income tax of 15% under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997, as amended ("Tax Code") . SDHTEC FACTS Mercury Media (formerly CIPEF (Cayman) Crunch Finance, Ltd.) is a foreign corporation organized and existing under the laws of the Cayman Islands based on its Amended and Restated Memorandum of Association and Certificate of Incorporation issued by the Registrar of Companies of the Cayman Islands. It is not registered as a corporation or partnership in the Philippines based on the Certification of Non-Registration of Company issued by the Securities and Exchange Commission. On the other hand, ABS-CBN is a domestic corporation engaged in the business of television and radio network broadcasting and other businesses incidental thereto, and in establishing, constructing, maintaining and operating for commercial purposes and in the public interest, television and radio broadcasting stations within or without the Philippines, using microwave, satellite or whatever means including the use of new technologies in television and radio systems. Mercury Media is likewise a holder of ______ Philippine Depository Receipts (PDRs) or _____% of all PDRs issued by ABS-CBN Holdings, a domestic shareholder of ABS-CBN, in accordance with and under the terms of the Philippine Deposit Receipt Instrument (the PDR Instrument) dated October 5, 1999 executed by the latter in favor of the PDR holders. The PDRs were issued for an amount equal to P_____ or such other adjusted amount. This amount less the option price of P____ is treated by ABS-CBN Holdings as deposit to be applied on exercise towards the payment for the relevant shares. One share of ABS-CBN Holdings in ABS-CBN relates to one PDR. AScHCD_ These PDRs are unsubordinated and unsecured obligations of ABS-CBN Holdings and rank pari passu and ratably without any preference among themselves. The obligations of ABS-CBN Holdings in respect of the PDRs are secured by the pledge in favor of the security agent acting on behalf of the holders. The pledge secures the delivery by ABS-CBN Holdings of the shares upon exercise of the PDRs. Among other rights, PDRs entitle the holders thereof to cash distributions as set out in Condition 9, to wit: 9. Cash Dividends and Other Cash Distributions "If and whenever the Company [ABS-CBN] shall issue any cash dividends or other cash distributions paid in respect of Shares received by the Issuer [ABS-CBN Holdings] (or the Security Agent on its behalf), such cash dividends or other cash distributions shall be applied to the following: xxx xxx xxx (iii) any amount remaining in excess of the aggregate of the Operating Expenses paid and the Operating Fund, for such period (as certified by the Auditor), shall be distributed to Holders pro rata not less than the first Business Day after such cash dividends are received by the Issuer." Believing that the cash distributions it received from ABS-CBN Holdings in connection with the following dividend declarations made by ABS-CBN in favor of its stockholder, including ABS-CBN Holdings: Date of Declaration Date of Payment Dividend rate February 22, 2017 On or before March 22, 2017 Php_____ per common share February 22, 2018 On or before March 22, 2018 Php_____ per common share February 28, 2019 On or before March 26, 2019 Php_____ per common share are similar to cash dividends from shares in a domestic corporation, Mercury Media now seeks confirmation these cash distributions are entitled to the reduced rate of 15% under Section 28 (B) (5) (b) of the Tax Code. RULING Under Section 28 (B) (5) (b) of the Tax Code, dividends paid by a domestic corporation to a nonresident foreign corporation ("NRFC") are subject to income tax of 15% provided that the country of residence of the NRFC shall allow a credit against its tax due taxes deemed to have been paid in the Philippines equivalent to fifteen percent (15%), to wit: HESIcT " SEC. 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; xxx xxx xxx" This tax deemed paid tax credit represents the difference between the regular income tax (30%) on corporations under Section 28 (B) (1) of the Tax Code, and the lower tax (15%) on dividends under Section 28 (B) (5) (b) thereof. Based on the above-quoted Tax Code provision, the reduced rate of 15% shall be imposed provided the following requisites are present: 1. the NRFC must have received dividends from a domestic corporation; and 2. the country of residence of the NRFC allows a credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines equivalent to 15%. The cash distributions are not dividends In order to determine whether the cash distributions received by Mercury Media from ABS-CBN Holdings are considered dividends for tax purposes, Section 73 (A) of the Tax Code must be read in conjunction with Section 22 (M) thereof, viz. : AcICHD " SEC. 73. Distribution of Dividends or Assets by Corporations. (A) Definition of Dividends. The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property. xxx xxx xxx" " SEC. 22. Definitions . When used in this Title: (M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s and/or option/s to purchase shares of stock of a corporation , as well as a holder of a unit of participation in a partnership (except general professional partnerships) in a joint stock company, a joint account, a taxable joint venture, a member of an association, recreation or amusement club (such as golf, polo or similar clubs) and a holder of a mutual fund certificate, a member in an association, joint-stock company, or insurance company." (Emphases supplied) Section 73 (A) of the Tax Code defines the term "dividends" as any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders. On the other hand, Section 22 (M) thereof defines the term "shareholder" as holders of a share/s of stock, warrant/s and/or option/s to purchase shares of stock of a corporation, as well as a holder of a unit of participation in a partnership (except general professional partnerships) in a joint stock company, a joint account, a taxable joint venture, a member of an association, recreation or amusement club (such as golf, polo or similar clubs) and a holder of a mutual fund certificate, a member in an association, joint-stock company, or insurance company. It may be inferred from the foregoing definitions that a PDR holder may be considered a shareholder and a recipient of dividends if he/she/it has an option to purchase the shares underlying the PDRs. A careful reading of Condition 5.2, in relation to 5.3, of the subject PDR Instrument leads us to the conclusion that Mercury Media cannot be considered a shareholder entitled to receive dividends. Condition 5.2 mentions the rights of the all PDR holders while Condition 5.3 explains further the conditions for the exercise of these rights as well as the obligations of the Issuer, the PDR holder and the eligible broker in case of delivery or sale of the underlying shares, to wit: "5.2 Each PDR grants unto the Holder, subject to the provisions of this Instrument, the right to: i) Delivery to the Holder of the Shares or sale and payment to the Holder of the net proceeds from the sale of Shares as set out in Condition 6; ii) Certain cash distributions as set out in Condition 9; and iii) Additional PDRs or adjustments to the terms of the PDRs upon the occurrence of certain events as set out in Condition 10. caITAC 5.3 The PDR Exercise Right is exercisable on any Business Day upon payment of the Exercise Price and compliance with Condition 6, and entitles the Holder to delivery by the Issuer through an Eligible Broker of the corresponding number of Shares (subject as provided in Condition 6 and to the issuance of additional PDRs or adjustment in accordance with Condition 10), to or to the order of the Holder: provided, however, that if the person to whom the Shares are to be delivered upon exercise of a PDR is not a person to whom delivery of the Shares is permitted under Philippine law and certification that such person is permitted under Philippine law to own the Shares is not obtained, the Holder hereby irrevocably authorizes the Issuer and the PDR Agent to and the Issuer shall: a) deliver the Shares to an Eligible Broker together with an irrevocable instruction to effect the sale of the Shares in the open market and b) remit the net proceeds of such sale to or to the order of the Holder in accordance with the Exercise Notice. The Issuer's obligations in respect to a PDR Exercise Right are discharged in the case of delivery pursuant to an exercise, upon delivery of the Shares to the Holder and in the case of a sale pursuant to an exercise, upon the sale of the Shares through such Eligible Broker in accordance with the Exercise Notice. (Emphasis supplied)" The exercise of the first mentioned right is subject to the condition under 5.3 of the PDR Instrument that the person to whom the shares are to be delivered is a person permitted under Philippine law to own the underlying shares. In other words, if the PDR holder is allowed by law to own the underlying shares, he/she/it may exercise the option to purchase the said shares and compel the delivery thereof upon payment of the exercise price. If, on the other hand, the PDR holder is not permitted under the law to own the said shares, he/she/it cannot compel the delivery thereof but is obliged to accept instead the net proceeds of the sale of these shares in an open market. It must be emphasized that the 1987 Philippine Constitution restricts the ownership and management of mass media, like ABS-CBN, to Filipino citizens or to corporations, cooperatives or associations wholly-owned and managed by such Filipino citizens. Section 11 (l), Article XVI (General Provisions) thereof reads as follows: " ARTICLE XVI GENERAL PROVISIONS Section 11. (l) The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens. TAIaHE xxx xxx xxx" Considering that Mercury Media is not a corporation wholly-owned and managed by Filipino citizens, it cannot, therefore, own and does not have any option or right to purchase or own, any share of a corporation the ownership and management thereof is restricted by law to Philippine nationals and corporations wholly owned by Philippine nationals. Contrary to your claim, Mercury Media does not have a legal right or option under the PDR instrument to purchase the underlying ABS-CBN shares. Mercury may have the right to sell the underlying shares in an open market, through an eligible broker, and the right to compel the delivery of the proceeds of such sale, but not the right to purchase the underlying shares. Hence, Mercury Media cannot, by any stretch of imagination, be considered a shareholder of ABS-CBN and the PDRs cannot be considered shares of stock. It bears stressing that before the PDR holder may be considered a shareholder under the Tax Code, he/she/it must have an option to purchase the shares underlying the PDRs coupled with a legal right to exercise the same without violating the provisions of the Constitution and special laws. Again, if the ownership of the underlying shares is reserved to Philippine nationals, the foreign PDR holder cannot legally exercise the right to purchase the underlying shares but is only entitled to the monetary value or sales proceeds thereof. What is more glaring in this case is that the cash distributions are akin to interest payments. Based on the PDR Instrument, the PDRs issued to Mercury Media are unsubordinated and unsecured obligations of ABS-CBN Holdings and any amount received from Mercury Media upon the issuance of the PDRs is considered by ABS-CBN Holdings as a deposit, secured by its shares in ABS-CBN. As such, the cash distributions made by ABS-CBN Holdings to Mercury Media may properly be classified as, or may take the form of, interest rather than dividends. In view of the foregoing, the cash distributions received by Mercury Media from ABS-CBN Holdings are not cash dividends subject to 15% under Section 28 (B) (5) (b) of the Tax Code but are interest subject to 30% under Section 28 (B) thereof. This ruling is issued on the basis of the facts as represented. However, if it will be disclosed upon investigation that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) ROMEO D. LUMAGUI, JR. Commissioner of Internal Revenue