Isla Lipana and Co.

November 19, 2018 ITAD BIR RULING NO. 116-18 Section 28 (B) (5) (b), National Internal Revenue Code of 1997, as amended Isla Lipana and Co. 29th Floor, Philamlife Tower 8767 Paseo de Roxas 1226 Makati City Attention: AAA _______________ Gentlemen : This refers to your letter dated December 14, 2016 requesting confirmation that dividends paid by Tyco Electronics Philippines, Inc. (" Tyco Philippines ") to TE Connectivity Holding International II s.a.r.l. (" TE Connectivity ") are subject to income tax at the rate of 15% under Section 28 (B) (5) (b) of the National Internal Revenue Code of 1997 (" Tax Code "), as amended. FACTS TE Connectivity is a foreign corporation organized and existing under the laws of Luxembourg and a resident thereof based on its Articles of Association and Certificate of Residence issued by the Tax Office of Luxembourg. Particularly, TE Connectivity is a private limited liability company or socit a responsabilit limite (" s.a.r.l. ") in Luxembourg. The object of TE Connectivity is to carry out all transactions pertaining directly or indirectly to the acquisition of participations in Luxembourg and foreign companies, partnerships or other entities, and the administration, management, control and development of those participations, as well as the entry into joint ventures. On the other hand, Tyco Philippines is a domestic corporation. Based on its amended Articles of Incorporation, the primary purpose of Tyco Philippines is to lease and provide interconnection systems; import application machineries, tools and other accessories; render technical assistance to customers and service equipment used in the production and manufacture of goods; manufacture connectors for lease and sale; engage in the supply, installation and repair of data networks; and perform other acts incidental or conducive to the foregoing activities. Based on Tyco Philippines ' Audited Financial Statements as of September 30, 2015, Tyco Philippines is a wholly-owned subsidiary of TE Connectivity since February 3, 2014. Tyco Philippines is subject to regular corporate income tax of 30% on its taxable income or profits. Based on Corporate Secretary's Certificate, on July 19, 2016, the Board of Directors of Tyco Philippines approved the distribution of dividends amounting to P_______________ to the corporation's shareholders of record as of July 19, 2016. TE Connectivity , being a socit a responsabilit limite , is exempt from income tax in Luxembourg on dividends derived from Tyco Philippines . Under Article 166 of the Luxembourg Tax Code, income from a holding held by a fully taxable resident corporate entity and having such forms including a socit a responsabilit limite is exempt from income tax in Luxembourg when, on the date on which the income is available, the beneficiary entity has held or undertakes to hold such holding for an uninterrupted period of at least twelve months, and that throughout this period the level of holding does not fall below 10%, or the acquisition price of the holding does not fall below 1,200,000 euros. Based on a Letter of Undertaking issued by TE Connectivity , the latter states that it owns 134,500 common shares of Tyco Philippines with a par value of P_____ each or equivalent to 100% ownership of Tyco Philippines as of December 14, 2015; that TE Connectivity received dividends from Tyco Philippines after the latter's declaration on July 19, 2016; that TE Connectivity commits to hold those shares for an uninterrupted period of at least twelve months from such date of dividend declaration; and that TE Connectivity commits that during the twelve-month holding period, its level of shareholding in Tyco Philippines will not fall below 10%. Based on a sworn statement issued by Tyco 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 proceedings, 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 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;" To be qualified, Section 28 (B) (5) (b) requires that the country of domicile or 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 30% under Section 28 (B) (1) of the Tax Code, and the lower tax on dividends at the rate of 15% under Section 28 (B) (5) (b) of the Tax Code. 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 if the country of domicile or residence of the NRFC exempts such dividends, this should be considered as full satisfaction of the tax sparing credit condition, thus: "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 Glaxo 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) Aside from the method of elimination of double taxation of the country of domicile or residence of the NRFC, it is also worth stressing that the reason for the reduction of tax on dividends is to mitigate the effects of economic double taxation of income in the Philippines of the NRFC, or the taxation of the same income in the hands of different taxpayers. Dividends paid to the NRFC are subject to economic double taxation, first , in the hands of the subsidiary paying the dividends whose taxable profits are subject to income tax at the rate of 30% under Section 27 (A) of the Tax Code, and, second , in the hands of the NRFC whose dividends are subsequently taxed at the rate of 30% under Section 28 (B) (1) of the Tax Code. Hence, the 15% lower tax. This is explained 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) Accordingly, dividends declared by Tyco Philippines on July 19, 2016 amounting to P_______________ and paid to TE Connectivity are subject to income tax at the rate of 15% under Section 28 (B) (5) (b) of the Tax Code by reason that the following conditions are met: 1. TE Connectivity is exempt from income tax in Luxembourg with respect to such dividends from Tyco Philippines ; and 2. Tyco Philippines is subject to the regular corporate tax of 30% on its taxable income or profits that warrants the reduction of tax on the dividends. To warrant 15% preferential income tax rate, TE Connectivity must hold the subject shares for an uninterrupted period of at least twelve months from such date of dividend declaration, and that, during the twelve-month holding period, its level of shareholding in Tyco Philippines will not fall below 10%. 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. Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue