Angara Abello Concepcion Regala and Cruz Law Offices

October 22, 2018 ITAD BIR RULING NO. 093-18 Section 28 (B) (5) (b) National Internal Revenue Code of 1997, as amended Angara Abello Concepcion Regala and Cruz Law Offices 22nd Floor, ACCRALAW Tower 2nd Avenue corner 30th Street Crescent Park West Bonifacio Global City 0399 Taguig City Attention: AAA BBB CCC Gentlemen : This refers to your letters dated May 4, 10 and 17, 2016 requesting confirmation that dividends paid by Metro Pacific Investments Corporation ("MPIC"),Security Bank Corporation ("Security Bank") and DMCI Holdings, Inc. ("DMCI") to Cartica Investors L.P. ("Cartica Investors") and Cartica Capital Partners Master L.P. ("Cartica Capital") 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") . aDTSHc FACTS Cartica Investors is foreign partnership organized and existing under the laws of the Cayman Islands based on its Amended and Restated Agreement of Limited Partnership and the Partnership Certificate of Existence issued by the Registrar of Limited Partnerships of the Cayman Islands. The purpose of Cartica Investors is to acquire, own and dispose securities and engage in financial transactions relating thereto or involving publicly-traded and private companies that are domiciled in or have substantial business activities in a particular country. Based on the Certification issued by the Cabinet Office of the Cayman Islands, and pursuant to Section 17 of the Exempted Limited Partnership Law, the Cayman Islands government undertakes that no law imposing any tax shall apply to Cartica Investors and its partners in respect of their operations and assets. This undertaking shall be for a period of fifty years from April 10, 2012. Cartica Capital is also a foreign partnership organized and existing under the laws of the Cayman Islands based on the Partnership Certificate of Existence issued by the Registrar of Limited Partnerships of the Cayman Islands. Based on the Certification issued by the Cabinet Office of the Cayman Islands, and pursuant to Section 17 of the Exempted Limited Partnership Law, the Cayman Islands government undertakes that no law imposing any tax shall apply to Cartica Capital and its partners in respect of their operations and assets. This undertaking shall be for a period of fifty years from October 29, 2008. MPIC, Security Bank and DMCI are domestic corporations listed in the Philippine Stock Exchange. 1 Cartica Investors and Cartica Capital are minority stockholders of these corporations. On March 1, 2016, MPIC declared cash dividends amounting to (a) P_____ per common share and (b) 10% of the par value of Class A preferred shares, to its stockholders of record as of March 30, 2016, payable on or before April 21, 2016. Cartica Investors and Cartica Capital will receive dividends amounting to P __________ and P __________ ,respectively. MPIC is subject to statutory income tax of 30% based on its Audited Financial Statements ("AFS") as of December 31, 2015. On April 26, 2016, Security Bank declared cash dividends amounting to (a) P_____ per common share to its stockholders of record as of May 11, 2016, and (b) P_____ per preferred share to its stockholders of record as of June 27, 2016. The dividends are payable on May 26, 2016 and July 11, 2016, respectively. Cartica Investors and Cartica Capital will receive dividends amounting to P __________ and P __________ ,respectively. Security Bank is subject to statutory income tax of 30% based on its AFS as of December 31, 2015. On May 11, 2016, DMCI declared regular cash dividends amounting to P_____ and special cash dividends amounting to P_____ per common share to its stockholders of record as of May 27, 2016, payable on June 10, 2016. Cartica Investors and Cartica Capital will receive dividends amounting to P __________ and P __________ ,respectively. DMCI is subject to statutory income tax of 30% based on its AFS as of December 31, 2015. 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 are subject to income tax of 15%, provided that the country of domicile of the foreign corporation shall allow a credit against the tax due from that corporation, taxes deemed to have been paid in the Philippines equivalent to 15%. This tax deemed paid credit is the difference between the regular 30% tax on dividends and the lower 15% tax on dividends imposed on a nonresident foreign corporation. Section 28 (B) (5) (b) provides: " 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 C od e, 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"; In Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals ( G.R. No. L-68375 dated April 15, 1988) ,the Supreme Court held that where the country of domicile of the foreign corporation exempts such dividends, this is considered a full satisfaction of the tax deemed paid credit condition, thus: IAETDc "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 C od e, 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) Also, it bears stressing that the reason for the reduction of tax on dividends is to mitigate the effects of double taxation of this income in the Philippines, first ,in the hands of the domestic corporation whose taxable profits are subject to 30% tax, and second ,in the hands of the nonresident foreign corporation whose dividends are subject also to 30% tax. This is emphasized in Commissioner of Internal Revenue vs. Procter and Gamble and the Court of Tax Appeals (G.R. No. L-66838, December 2, 1991) ,thus: "As I understand it, the intention of Section 24(b) of our Tax C od e 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) In the instant case, since MPIC , Security Bank and DMCI are domestic corporations subject to statutory income tax of 30%,dividends paid by these corporations should be mitigated and eligible to a reduced tax. Moreover, since, Cartica Investors and Cartica Capital ,the minority stockholders of MPIC, Security Bank and DMCI ,are exempt from income tax in the Cayman Islands, Cartica Investors and Cartica Capital comply with the tax deemed paid credit condition in Section 28 (B) (5) (b) of the Tax Code. Therefore, dividends paid by MPIC, Security Bank and DMCI to Cartica Investors and Cartica Capital are subject to 15% under this section of the Tax Code. For future payment of dividends, the 15% tax shall apply provided that MPIC, Security Bank and DMCI continue to be subject to the statutory income tax of 30%,and that Cartica Investors and Cartica Capital continue to be exempt in the Cayman Islands. 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. HDTCSI Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. See: http://www.pse.com.ph/stockMarket/listedCompanyDirectory.html .