Peopleplus Tech, Inc.

August 31, 2018 ITAD BIR RULING NO. 080-18 Section 28 (B) (5) (b) National Internal Revenue Code of 1997, as amended Articles 6 (General Rules for Taxation) and 11 (Dividends) Philippines- United States of America tax treaty Peopleplus Tech, Inc. 9th Floor, 6780 Building 6780 Ayala Avenue Makati City Attention: AAA _______________ Gentlemen : This refers to your application filed on July 11, 2016 requesting confirmation that dividends paid by Peopleplus Tech, Inc. (" Peopleplus ") to Roen Technology LLC (" Roen ") (formerly Joy Technology LLC ) are subject to income tax at the rate of 15 percent under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997, as amended (" Tax Code "). FACTS Roen is a foreign corporation organized and existing under the laws of the United States. It is not a registered corporation or partnership in the Philippines. As of March 31, 2016, Roen is the registered owner of 29,750 common shares of stock of Peopleplus with par value of P_____ each or a total of P__________, which represent 99 percent ownership in Peopleplus . On June 10, 2016, the Board of Directors of Peopleplus approved a resolution authorizing the declaration of dividends amounting to P __________ per share in favor of the company's stockholders as of March 31, 2016 and to be taken from its retained earnings as of that date. CAIHTE Peopleplus is a registered IT enterprise with the Philippine Economic Zone Authority (" PEZA ") engaged in software development, and subject to 5 percent income tax on its gross income under Republic Act No. 7916, as amended. 1 In 2015 and 2014, Peopleplus ' revenues were derived purely from PEZA-related activities. RULING In reply, please be informed that under Section 28 (B) (1) of the Tax Code, income derived in the Philippines by a nonresident foreign corporation (" NRFC ") is subject to income tax at the rate of 30 percent, to wit: " SEC. 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5 (c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, under Section 32 (B) (5) of the Tax Code, income is exempt or partially exempt to the extent required by any treaty obligation on the Philippines, to wit: " SEC. 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty . Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines." In this connection, paragraph 2, Article 11 of the Convention between the Government of the Republic of the Philippines and the Government of the United States of America with Respect to Taxes on Income (" Philippines-United States tax treaty ") provides that dividends arising in the Philippines and paid to a resident of the United States are subject to a lower rate of income tax which shall not exceed 25 or 20 percent, to wit: " Article 11 DIVIDENDS 1. Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 2. The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed a) 25 percent of the gross amount of the dividend; or b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation." Moreover, under paragraph 2, Article 6 (General Rules for Taxation) of the Philippines-United States tax treaty, the treaty will not prevent the application of a more preferential tax treatment in favor of residents of the United States where such treatment is contained in the domestic laws of the Philippines or in another agreement between the Philippines and the United States, to wit: "2. The provisions of this Convention shall not be construed to restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded a) By the laws of one of the Contracting States in the determination of the tax imposed by that Contracting State, or b) By any other agreement between the Contracting States." In this connection, Section 28 (B) (5) (b) of the Tax Code provides a lower tax rate of 15 percent on dividends paid by a domestic corporation to an NRFC, to wit: DETACa " 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 56 (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" ; To be qualified, Section 28 (B) (5) (b) requires that the country of domicile of the NRFC shall allow a credit against the tax due from it, taxes deemed to have been paid in the Philippines equivalent to 15 percent, which represents the difference between the regular income tax of 30 percent on domestic corporations and the preferential 15 percent tax on dividends on NRFC . Before January 1, 2009, and under the old Tax Codes of 1939 and 1977, the credit sought was equivalent to 20 percent, which represents the difference between the regular income tax of 35 percent at those times and the 15 percent tax on dividends. From those conditions alone, Roen does not qualify for the 15 percent tax on dividends it will receive from its wholly-owned subsidiary, Peopleplus . To avail this rate, an indirect foreign tax credit equivalent to at least 15 percent must be allowed by the United States, the country of domicile of Roen . This credit is the difference between the regular corporate tax of 30 percent on domestic corporations and the preferential 15 percent tax. As PEZA-registered entity, Peopleplus is not subject to 30 percent corporate tax on its taxable income (profit before tax), but to a lower rate of 5 percent on its gross taxable income (gross profit). While having a different tax base, we note that the income tax expense of Peopleplus in 2015 accounted for only 5.72 percent 2 reduction from its net taxable income (profit before tax) which is below the regular rate of 30 percent. To emphasize, in Commissioner of Internal Revenue vs. Procter and Gamble and the Court of Tax Appeals (G.R. No. L-66838, December 2, 1991) (" Procter and Gamble case "), the Supreme Court explained that a lower tax on dividends promotes foreign investments in the country: "As I understand it, the intention of Section 24 (b) of our Tax Code is to attract, foreign investors to this country by reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective tax 'take' of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only, both payable to the Philippines , with the US tax liability being offset wholly or substantially by the US 'deemed paid' tax credits. Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden of the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state." (Emphasis ours) Simply put, a lower tax on dividends seeks to mitigate the effects of economic double taxation of profits of a domestic subsidiary and dividends paid by the subsidiary to its foreign parent. Without this relief, the profits and dividends are both subject to an income tax rate of 30 percent under the current Tax Code, and 35 percent before January 1, 2009 and under the old Tax Codes of 1939 and 1977. Therefore, an equivalent deemed paid credit is required before this Bureau grants the lower 15 percent tax on dividends taking into account the prevailing high corporate tax on subsidiary of 30 percent (previously, 35 percent). Domestic subsidiaries enjoying preferential corporate tax rate of 5 percent and those enjoying income tax holiday (zero percent) whose effective corporate tax rate is below 30 percent are not eligible to the 15 percent tax on dividends since they are already given relief at the level of the subsidiary in the form of a low or no corporate income tax. However, should these subsidiaries have profits or income which were subjected to the regular rate of 30 percent, dividends paid out of these profits or income and made to their parent corporations in the United States are eligible to the 15 percent tax under Section 28 (B) (5) (b) of the Tax Code taking into account the pronouncement in the Procter and Gamble case. This being the case, instead of the desired 15 percent, and since Roen is a United States corporation which owns more than 10 percent (in fact, 99 percent) of the voting stock (common shares) of Peopleplus , such dividends paid by Peopleplus to Roen are subject to income tax at the rate of 20 percent under paragraph 2 (b), Article 11 of the Philippines-United States tax treaty, as cited above. 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. aDSIHc 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. 2. Based on Peopleplus ' Audited Financial Statements ending December 31, 2015, it has profit-before-tax of P__________ and income tax expense of P__________ consisting of 5 percent gross income tax for PEZA-related activities (P__________) and tax effects of non-deductible cost of services (P__________) The ratio between income tax expense and profit-before-tax is 5.72 percent (P__________/__________). n Note from the Publisher: Copied verbatim from the official document.