Sycip Gorres Velayo and Co.

June 3, 2019 ITAD BIR RULING NO. 011-19 Section 28 (B) (5) (b) National Internal Revenue Code of 1997, as amended Sycip Gorres Velayo and Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA __________ Gentlemen : This refers to your letter dated February 29, 2016 requesting confirmation that dividends paid by Hyundai Asia Resources, Inc. (" HARI ") to Kibo Holdings Ltd. (" Kibo Holdings ") of the British Virgin Islands are subject to income tax at the rate of 15% under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997 (" Tax Code "),as amended. FACTS Kibo Holdings is foreign corporation organized and existing under the laws of the British Virgin Islands (" BVI ") based on its Articles of Association and Certificate of Incorporation. Based on the Certificate of Tax Exemption issued by the Inland Revenue Department of BVI on December 24, 2015, Kibo Holdings was incorporated as an International Business Company in BVI on April 25, 2008. Pursuant to Section 242 (1) and (3) of the BVI Companies Act of 2004, Kibo Holdings is exempt from all provisions of the Income Tax Ordinance and is exempt from the payment of stamp duty under the Stamp Act. Moreover, since Kibo Holdings is not authorized to conduct any business within BVI, it is not required to be registered with the Inland Revenue Department and to have a taxpayer identification number. Kibo Holdings 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 (" SEC "). On the other hand, HARI is a domestic corporation engaged in the business of manufacturing, assembling, importing, exporting, selling on wholesale or retail basis, and distribution of automotive units and products to accredited dealers in the Philippines. It was incorporated in the Philippines and registered with the SEC on August 3, 2001. Based on its Audited Financial Statements as of December 31, 2014, HARI is subject to income tax at the statutory rate of 30%.Based on its General Information Sheet as of October 7, 2015, Kibo Holdings holds 17,479,994 of the outstanding and subscribed common shares of HARI ,each share with a par value of Php100, and which account for 87.40% ownership in the company. Based on the Corporate Secretary's Certificate issued on December 3, 2015, the Board of Directors of HARI authorized the declaration of dividends to all stockholders of record of the company as of December 31, 2014. HARI will be paying dividends to Kibo Holdings amounting to Php262,199,910. RULING In reply, please be informed that 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 at the rate of 15%,to wit: " 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 C od e, 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;" To be qualified, Section 28 (B) (5) (b) requires that the country of residence of the NRFC shall allow a credit against the tax due from the NRFC taxes deemed to have been paid in the Philippines equivalent to 15%.The taxes deemed to have been paid in the Philippines (also known as tax sparing credit ) is the difference between the regular tax of 30% on income (including dividends) of an NRFC under Section 28 (B) (1) of the Tax Code, and the lower tax of 15% on dividends under Section 28 (B) (5) (b) of the Tax Code. In Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals ( G.R. No. L-68375 dated April 15, 1988 ) (" Wander Philippines case "), the Supreme Court held that if the country of domicile of the NRFC does not impose tax on dividends received by the NRFC from a domestic corporation in the Philippines, the condition imposed under Section 28 (B) (5) (b) of the Tax Code is deemed satisfied, thus: "While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines should be considered as a full satisfaction of the given condition . For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold only 15% tax provided for under Presidential Decree No. 369, amending Section 24(b)(1) of the Tax C od e, would run counter to the very spirit and intent of said law and definitely will adversely affect foreign corporations' interest here and discourage them from investing capital in our country." Besides, it is significant to note that the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of petitioner that since the Swiss Government does not impose any tax on the dividends to be received by the said parent corporation in the Philippines, the condition imposed under the above-mentioned section is satisfied. Accordingly, the withholding tax rate of 15% is hereby affirmed ." (Emphasis ours) Aside from tax sparing credit requirement, it is worth stressing that the reason for lowering the tax on dividends is to mitigate the economic double taxation of income derived by a foreign investor in the Philippines operating through a domestic subsidiary. In Commissioner of Internal Revenue vs. Procter and Gamble and the Court of Tax Appeals (G.R. No. L-66838, December 2, 1991) (" Procter and Gamble case "),the Supreme Court explained: "As I understand it, the intention of Section 24(b) of our Tax C od e is to attract foreign investors to this country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective tax 'take' of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only, both payable to the Philippines, with the US tax liability being offset wholly or substantially by the US 'deemed paid' tax credits . Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same amount of dividends .In this circumstance, it is not likely that many such foreign investors, given the onerous burden of the two-tier system, i.e.,local state plus home state, will be encouraged to do business in the local state." (Emphasis ours) Simply put, without a lower tax on dividends, the foreign investor would end up paying 60% (previously 70%) tax in the Philippines for such dividends: first ,in the form of the 30% (previously 35%) corporate income tax imposed on the taxable profits of the domestic subsidiary out of which the dividends were paid, and, second ,in the form of the 30% (previously 35%) final income tax on dividends. Accordingly, the dividends paid by HARI to Kibo Holdings are subject to income tax at the rate of 15% under Section 28 (B) (5) (b) of the Tax Code based on the following premises: 1. Kibo Holdings is a foreign corporation domiciled in the British Virgin Islands, which is exempt from income tax imposed therein including tax on dividends received from HARI ;and 2. HARI ,the domestic corporation paying the dividends, is subject to regular corporate income tax of 30% ,which thereby warrants the reduction of tax on such dividends. 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, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue