Isla Lipana & Co.

October 5, 2020 ITAD BIR RULING NO. 064-20 Section 28 (B) (5) (b) of National Internal Revenue Code of 1997, as amended Isla Lipana & Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA Gentlemen : This refers to your letters dated October 30, 2019, August 14, 2019 and April 10, 2019 requesting confirmation that dividends paid by Wilcon Depot, Inc. ("Wilcon"), Philippine Seven Corporation ("7/11") and Shakey's Pizza Asia Ventures, Inc. ("Shakey's") to Albizia ASEAN Opportunities Fund ("Albizia") 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"). FACTS Albizia is a foreign corporation organized and existing under the laws of the Cayman Islands based on its Certificate of Incorporation. 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, Wilcon, 7/11 and Shakey's are domestic corporations. Based on the Corporate Secretary's Certificates of Wilcon, 7/11 and Shakey's, their respective Board of Directors declared cash dividends as follows: Domestic Corporation Date of declaration Date payable Shares held Dividend rate Dividends payable Wilcon March 6, 2019 April 16, 2020 78,312,200 P___/share (Php___ regular and Php___ special) P____________ 7/11 July 18, 2019 August 16, 2019 17,764,532 Php____/share P____________ Shakey's June 20, 2019 August 14, 2019 60,795,800 Php____/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;" AHCETa 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 does not impose tax on dividends which the latter received from a domestic corporation, this should be considered as full satisfaction of the tax sparing credit condition, 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). Thus, on September 29, 2009, Albizia was able to obtain a confirmation/undertaking to that effect from the Governor in Cabinet of the Cayman Islands. The said undertaking is for a period of twenty years from the date of issuance. Moreover, there is no income tax, company or corporation tax, inheritance tax, capital gains or gift tax in the Cayman Islands. 1 Accordingly, since Albizia is an NRFC, and its country of residence, the Cayman Islands, did not impose any tax on the dividends it received from the Philippines pursuant to Section 6 of the amended Tax Concessions Law of the Cayman Islands and as confirmed by the Governor in Cabinet, such dividends paid by Wilcon, 7/11 and Shakey's to Albizia are, therefore, subject to income tax at the rate of 15% pursuant Section 28 (B) (5) (b) of the Tax Code. ScHADI This ruling is issued on the basis of the facts as represented. However, if it shall be disclosed upon investigation 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 Footnotes 1. http://www.gov.ky/portal/page/portal/cighome/cayman/theeconomy/taxes