Diaz Murillo Dalupan and Company

June 26, 2020 ITAD BIR RULING NO. 054-20 Section 28 (B) (5) (b) National Internal Revenue Code of 1997, as amended Diaz Murillo Dalupan and Company Certified Public Accountants 7th and 8th Floors, Don Jacinto Building Dela Rosa corner Salcedo St., Legaspi Village 1200 Makati City Attention: AAA BBB Gentlemen : This refers to the letter dated April 13, 2012 requesting confirmation that dividends paid by Forever Living Products Philippines, Inc. ("Forever-PH") to Forever Living Products Philippines, LLC ("Forever-US") 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 Forever-US is a foreign corporation organized and existing under the laws of the United States of America ("US") and a resident thereof based on its Articles of Organization and Certificate of Residence issued by the Internal Revenue Service. 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, Forever-PH is a domestic corporation that is subject to regular corporate income tax of 30% based on the Bureau of Internal Revenue's Integrated Tax System. On February 17, 2012, the Board of Directors of Forever-PH declared a cash dividend in the total amount of USD ______________ (PHP ______________ ) to be payable to all stockholders of record as of December 31, 2011 and distributable not later than May 12, 2012. As of December 31, 2011, Forever-US holds 90,695 common shares of Forever-PH accounting for 99.99% ownership in Forever-PH and thereby entitling it to dividends amounting to PHP ______________ . cSaATC 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), 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 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. cHDAIS 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, the dividends paid by Forever-PH to Forever-US , 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. Forever-PH , the Philippine subsidiary which paid the dividends, 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. 2. Forever-US is a resident of the US and under its tax law, the US allows a 'deemed paid' or 'tax sparing' credit equivalent to at least 15% for taxes deemed paid in the Philippines against the US tax of Forever-US . 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. ISHCcT Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue