SGV & Co.

June 8, 2021 ITAD BIR RULING NO. 029-21 Section 28 (B) (5) (b) National Internal Revenue Code of 1997, as amended SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your letters dated December 27, 2019 and February 14, 2019 requesting confirmation that dividends paid by Cosco Capital Incorporated ("Cosco") to Target Value Fund ("Target Value") 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") . HTcADC FACTS Target Value is a corporation organized and existing under the laws of the Cayman Islands based on its Articles 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 duly issued by the Securities and Exchange Commission (SEC). On the other hand, Cosco is a domestic corporation. Target Value owns 238,812,100 common shares in Cosco, representing 3.2872% of the outstanding shares of the latter. Based on the Corporate Secretary's Certificates, the Board of Directors of Cosco declared cash dividends as follows: Date of declaration Number of shares held Date payable Dividend rate Dividends payable December 10, 2019 January 24, 2020 Regular dividends of P0.08 per share and special dividend of P0.04 per share P_____________ February 1, 2019 March 1, 2019 Regular dividends of P0.06 per share and special dividend of P0.04 per share P_____________ RULING In reply, please be informed that dividends paid by a domestic corporation to a nonresident foreign corporation ("NRFC") are subject to income tax at the rate of 15% under Section 28 (B) (5) (b) of the Tax Code, 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 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 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%. This tax deemed paid credit (also known as tax sparing 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. 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 case") , the Supreme Court held that if the country of residence of the NRFC did not impose tax on the dividends it received from the Philippines, the tax sparing credit condition is satisfied, to wit: "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 Code, 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) Pursuant to Section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, an exempted company may obtain an undertaking from the Governor in Council: 1. that no law which is enacted in the Cayman Islands imposing any tax to be levied on profits or income or gains or appreciation shall apply to the exempted company or its operations; and 2. in addition, that no tax to be levied on profits, income gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable by the exempted company: a. on or in respect of the shares, debentures or other obligations of the exempted company; or b. by way of withholding in whole or in part of any relevant payment as defined in Section 6 (3) of the Tax Concessions Law (1999 Revision). CAIHTE On March 29, 2011, the Governor in Cabinet of the Cayman Islands issued an Undertaking as to the Tax Concessions in favor of Target Value exempting it from any income tax, including any tax to be levied on profits, income, gains or appreciations on or in respect of its shares, debentures or other obligations, in accordance with aforecited law. This undertaking is valid for a period of 25 years beginning March 29, 2011. Moreover, there is no income tax, company or corporation tax, inheritance tax, capital gains or gift tax in the Cayman Islands. 1 Accordingly, since Target Value is an NRFC, and its country of residence, the Cayman Islands, did not impose any tax on the dividends it received from Cosco pursuant to Section 6 of the amended Tax Concessions Law of the Cayman Islands and as confirmed by the Governor in Cabinet, the subject dividends are, therefore, subject to income tax at the rate of 15% pursuant Section 28 (B) (5) (b) of the Tax Code. This ruling is issued based on the facts as represented. However, if it shall 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.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. http://www.gov.ky/portal/page/portal/cighome/cayman/theeconomy/taxes