Romulo Mabanta Buenaventura

March 11, 2020 ITAD BIR RULING NO. 037-20 Section 28 (B) (5) (b) National Internal Revenue Code of 1997, as amended Romulo Mabanta Buenaventura Sayoc and De Los Angeles Attorneys at Law 21st Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA Gentlemen : This refers to your letter dated January 3, 2017 requesting confirmation that dividends paid by the Bank of the Philippine Islands ("BPI") to Genesis Emerging Markets Investment Company ("Genesis") are subject to income tax at the rate of fifteen percent (15%) under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997 ("Tax Code") , as amended. FACTS Genesis is a corporation organized and existing under the laws of Luxembourg and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Administration des Contributions Directes of Luxembourg. Particularly, Genesis is a public limited liability ("socit anonyme") qualifying as an investment company with variable share capital ("socit d'investissement capital variable") in Luxembourg. Genesis was established for the purpose of investing the funds available to it in securities of all kinds, undertakings for collective investment as well as any other permissible assets, with a view of spreading investment risks and enabling its shareholders to benefit from the results of the management thereof. 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, BPI is a domestic corporation operating as a commercial bank with expanded banking license based on its Audited Financial Statements as of December 31, 2015. BPI is subject to regular corporate income tax of thirty percent (30%) on its taxable income or profits. On June 15, 2016, the Board of Directors of BPI declared regular cash dividends amounting to P_____ per share for the first semester of 2016 on the total outstanding common shares of BPI , payable to all stockholders of record as of June 29, 2016, and distributable on July 20, 2016. As of June 29, 2016, Genesis holds 9,509,526 common shares of BPI , thereby entitling it to dividends amounting to P__________. caITAC Also, on December 14, 2016, the Board of Directors of BPI declared regular cash dividends amounting to P_____ peso per share for the second semester of 2016 on the total outstanding common shares of BPI , payable to all stockholders of record as of December 29, 2016, and distributable on January 29, 2016. Genesis , being a socit d'investissement capital variable , is exempt from all taxes in Luxembourg but subject to capital duty and subscription tax in Luxembourg, under Article 66 of the Specialized Investment Funds of Luxembourg dated February 13, 2007, as amended. 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 fifteen percent (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 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;" The main purpose of reducing the tax on dividends is to eliminate double taxation and thereby attract foreign investments in the Philippines. This was explained by the Court in the case of Commissioner of Internal Revenue vs. Procter and Gamble and the Court of Tax Appeals (G.R. No. L-66838, December 2, 1991) ("P&G case") , thus: " Section 24 (b) (1) [now Section 28(B)(5)(b) ], NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more 'post-R.P. tax' income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly, Section 24(b)(1) [now Section 28(B)(5)(b) ], NIRC, requires the home or domiciliary country to give the investor corporation a 'deemed paid' tax credit at least equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor." 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 fifteen percent (15%). This tax deemed paid credit (also known as tax sparing credit ) is the difference between the regular tax on income of an NRFC at the rate of thirty percent (30%) under Section 28 (B) (1) of the Tax Code, and the lower tax on dividends at the rate of fifteen percent (15%) under Section 28 (B) (5) (b) of the Tax Code. ICHDca 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 the tax sparing credit condition is deemed fulfilled if the country of residence does not impose any tax on the dividends received by the NRFC from the Philippines: "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) In the later P&G case, the Court further held that the law 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%) [now thirty percent (30%)] to fifteen percent (15%): "The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign stockholder corporation 'shall allow' such foreign corporation a tax credit for 'taxes deemed paid in the Philippines,' applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA 'shall allow' to P&G-USA a tax credit for 'taxes deemed paid in the Philippines' applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit for 'taxes deemed paid in the Philippines' must, as a minimum, reach an amount equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate. It is important to note that Section 24(b)(1), NIRC, does not require that the US must give a 'deemed paid' tax credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred dividend tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only requires that the US 'shall allow' P&G-USA a 'deemed paid' tax credit in an amount equivalent to the twenty (20) percentage points waived by the Philippines." Accordingly, dividends paid by BPI to Genesis are subject to income tax at the rate of fifteen percent (15%) under Section 28 (B) (5) (b) of the Tax Code for the following reasons: 1. Genesis , as an NRFC, is exempt from all taxes in Luxembourg, which include income tax that might be imposed by Luxembourg on dividends derived by Genesis from sources within the Philippines, consistent with the Wander case; and 2. BPI , as a domestic corporation, is subject to regular corporate income tax of 30% on its taxable income or profits, which warrants the reduction of tax on dividends it paid to its nonresident corporate stockholders, consistent with the P&G case. 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