R.G. Manabat & Co.

June 26, 2020 ITAD BIR RULING NO. 049-20 Section 28 (B) (5) (b) National Internal Revenue Code of 1997, as amended R.G. Manabat & Co. 9th Floor, The KPMG Center 6787 Ayala Avenue Makati City Attention: AAA _______________ Gentlemen : This refers to your letter dated December 23, 2014 requesting confirmation that dividends paid by VFS Services Philippines Private, Inc. ("VFS Philippines") to VF Worldwide Holdings Ltd. ("VF Worldwide") are subject to income tax at the rate of 15% under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997, as amended ("Tax Code") . FACTS VF Worldwide is a holding company organized and existing under the laws of Mauritius and a resident thereof based on its Tax Residence Certificate issued by the Mauritius Revenue Authority. 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, VFS Philippines is a domestic corporation engaged in providing technological and logistics support services to diplomatic missions, embassies and consulates in the Philippines, including airlines, travel agents, travel managers, associates, trade and travel bodies and government bodies. VFS Philippines is a wholly-owned subsidiary of VF Worldwide . Based on its Audited Financial Statements as of December 31, 2015, VFS Philippines is a registered enterprise with the Philippine Economic Zone Authority ("PEZA") and subject to five percent (5%) gross income tax (in lieu of all national and local taxes) under Republic Act No. 7916. 1 This tax applies only to the company's processing of visa applications for the United States and the United Kingdom. Other company's activities including processing of visa applications for other countries like the Netherlands, Canada, Australia, Spain, Norway, Denmark, Croatia, France, the United Arab Emirates and Malaysia are subject to the regular income tax of thirty percent (30%) under Section 27 (A) of the Tax Code. On August 15, 2016, the Board of Directors of VFS Philippines declared cash dividends amounting to Php __________ in favor of the company's stockholders, to be taken out of its accumulated retained earnings, and payable on or before October 31, 2016. VF Worldwide holds 95,091 of the 95,096 common shares of stock of VFS Philippines , accounting for 99.99% ownership in the company. EDCcaS Based on the Tax Residence Certificate issued by the Mauritius Revenue Authority, VF Worldwide is a company resident of Mauritius for income tax purposes under the Income Tax Act of Mauritius of 1995. Under Section 7 (Underlying Foreign Tax Credit) of the Income Tax Regulations of Mauritius of 1996, where dividends are paid by a company which is not resident of Mauritius to a person who is resident of Mauritius, and who owns directly or indirectly at least five percent (5%) of the share capital of the company paying the dividends, the foreign income tax credit allowed by Mauritius shall include, in addition to the actual foreign income tax imposed on the dividends, foreign income tax imposed on the income of the company out of which the dividends were paid. This additional credit is referred in the regulations as underlying credit . In computing the underlying credit , any foreign income tax on the profits out of which the dividends have been paid shall be regarded as having been imposed ratably on all the profits of the company paying the dividends. Also, under Section 9 (Tax Sparing Credit) of the Regulations, where the Director-General is satisfied that provisions have been introduced in the law of a foreign country with a view to promoting industrial, commercial, scientific, educational or other development in that country and that under those provisions, (a) a lower rate of tax has been imposed in that country than would otherwise have been the case; or (b) income has been exempted from tax which would otherwise have been chargeable to foreign tax, Mauritius shall allow a credit for the amount of foreign tax which would have been chargeable had those provisions not been enacted. The amount of foreign tax for which credit is to be allowed shall be presumed to have been charged. Based on a sworn statement issued by VFS Philippines , the income subject of this ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceeding, or judicial appeal. 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: ISHaCD "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. Moreover, the Court 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%): DHESca "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, consistent with the P&G case, dividends paid by VFS Philippines to VF Worldwide 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. VFS Philippines , as domestic corporation, is subject to regular corporate income tax of thirty percent (30%) on its taxable income or profits (except those derived from PEZA-registered activities) which warrants the reduction of tax on dividends it paid to its nonresident corporate stockholder. 2. VF Worldwide , as resident of Mauritius, owns directly 99.99% of the share capital of VFS Philippines , a company situated outside Mauritius. Under Section 7 of the Income Tax Regulations of Mauritius, Mauritius shall allow an underlying credit to VF Worldwide for dividends received from VFS Philippines , in addition to the actual fifteen percent (15%) income tax on such dividends under Section 28 (B) (5) (b) of the Tax Code. The underlying credit is ratably equivalent to the income tax imposed in the Philippines on the profits of VFS Philippines out of which such dividends were paid. Also, under Section 9 of the Regulations, where the Director-General is satisfied that provisions have been introduced in the law of the Philippines with a view to promoting industrial, commercial, scientific, educational or other development in that country and that under those provisions, (a) a lower rate of income tax has been imposed than would otherwise have been the case; or (b) income has been exempted from income tax, Mauritius shall allow a credit for the amount of Philippine income tax which would have been chargeable on the Philippine company paying such dividends to a Mauritius company had those provisions not been enacted. The amount of foreign tax for which credit is to be allowed shall be presumed to have been charged. 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. TEHIaD Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. An Act Providing for the Legal Framework and Mechanism for the Creation, Operation, Administration, and Coordination of Special Economic Zones in the Philippines, Creating for this Purpose, the Philippine Economic Zone Authority (PEZA), and for Other Purposes, as amended.