ITAD Ruling No. 033-04

April 2, 2004 ITAD RULING NO. 033-04 Section 28 (B) [5] (b) NIRC of 1997 BIR RULING No. 008-00 Luis Caete & Company 3/F Oftana Building Jasmine cor Don Mariano Cui Streets Cebu City Gentlemen : This refers to your letter dated June 18, 2003 on behalf of your client Mauri Fermentation Philippines Pty. Limited (MFP), applying for a preferential tax rate of fifteen percent (15%) pursuant to Article 10 of the Philippines-Australia tax treaty on the dividends paid by Philmico-Mauri Foods Corporation (PMF) to MFP. It is represented that MFP is a corporation organized and existing under the laws of Australia with principal address at 56 Pitt. Street, Sydney, Australia; that it is not registered either as a corporation or as a partnership and has not been licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated May 29, 2003; that PMF is a corporation with principal office at Aboitiz complex, Archbishop Reyes Avenue, Banilad, Cebu City; that as of October 10, 2002, MFP is the registered owner of 37,449,997 common shares representing 49.99% of the 75,000.000 outstanding issued shares of PMF; that on April 11, 2003, the Board of Directors of PMF declared a cash dividend out of the corporation's retained earnings as of December 31, 2002 in the amount of Thirty Million Pesos (Php 30,000,000.00) to the stockholders of record as of April 11, 2003, payable on or before May 6, 2003. It is further represented that pursuant to Australia's Income Tax Assessment Act of 1936, where an Australian company owns more than 10% interest in an overseas entity, the dividend paid to the Australian company will be exempt from Australian tax on the basis that the income has been taxed already in the overseas jurisdiction. In reply, please be informed that Articles 10 and 24 of the Philippines-Australia tax treaty provide: "ARTICLE 10 "DIVIDENDS (1) Dividends paid by a company which is a resident of one of the Contracting States for the purposes of its tax, being dividends to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. (2) Such dividends may be taxed the Contracting State of which the company paying the dividends is a resident for the purposes of its tax, and according to the law of that State, but the tax so charged shall (a) in the case of dividends derived by a company, not exceed 15 per cent of the gross amount of the dividends where relief, either by way of rebate or credit as described in paragraph (2) of Article 24 or relief by way of credit as described in the second sentence of paragraph (4) of Article 24 , is given to the beneficial owner of the dividends; and (Emphasis ours) (b) in any other case, not exceed 25 per cent of the gross amount of the dividends. Nothing in this paragraph shall affect the taxation of a company in respect of profits out of which dividends are paid. (3) The term 'dividends' in this Article means income from shares and other income assimilated to income from shares by the taxation law of the Contracting State of which the company making the distribution is a resident. xxx xxx xxx" "ARTICLE 24 "METHODS OF ELIMINATION OF DOUBLE TAXATION (1) Subject to the provisions of the law of Australia from time to time in force which relate to the allowance of a credit against Australia from time to time in force which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle hereof), Philippine tax paid, whether directly or by deduction, in respect of income derived by a person who is a resident of Australia from sources in the Philippines (excluding, in the case of dividends, tax paid in respect of the profits out of which the dividends are paid except to the extent that the provisions of paragraph 2 may permit that tax to be included) shall be allowed as a credit against Australian tax payable in respect of that income. xxx xxx xxx (2) A company which is a resident of Australia is, in accordance with the provisions of the taxation law of Australia in force at the date of signature of this Agreement, entitled to a rebate in its assessment at the average rate of tax payable by the company in respect of dividends that are included in its taxable income and are received from a company that is a resident of the Philippines . However, should the law so in force be amended so that the rebate in relation to the dividend ceases to be allowable under the law, credit shall be allowed to the first-mentioned company under paragraph (1) for the Philippines tax paid on the profits out of which the dividends are paid, but only if that company beneficially owns at least 10 per cent of the paid-up share capital of the second-mentioned company. (Emphasis ours) xxx xxx xxx" Based on the aforequoted provisions, dividends paid by a Philippine company to a company which is a resident of Australia may be taxed at a rate not exceeding 15 per cent of the gross amount of the dividends where relief is given to the said Australian company by way of rebate or credit in respect of the dividends that are included in its taxable income or should the rebate in relation to the dividends ceases to be allowable where the Australian company beneficially owns at least 10 per cent (10%) of the paid-up share capital of the Philippine company. In view of the representation that under Section 23AJ of the Tax Act of Australia, foreign dividends received in Australia are no longer included as taxable income but are treated as exempt, in which case then, no Philippine-sourced dividend income will be subject to tax in Australia against which a tax rebate may be claimed. It appears, therefore, that the provisions on rebate of tax on dividends as provided for in the Philippines-Australia tax treaty as a pre-requisite in availing the 15% preferential rate is not met. Hence, the provisions of the said treaty on dividends shall not apply in the instant case. However, Section 28(B)[5](b) of the National Internal Revenue Code of 1997 (NIRC of 1997), provides, viz : 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%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph; It is clear from the above provisions that the dividends received by MFP from PMF shall be taxed at 15% subject to the condition that Australia shall allow a credit against the tax due from MFP's corporate taxes deemed to have been paid in the Philippines equivalent to 17% which represents the difference between the regular tax (32%) on corporations and the tax (15%) on dividends. In the instant case, the fact that Australia will not impose any tax on the dividends received by MFP from PMF should be considered as a full satisfaction of the given condition. For to deny the privilege to withhold only 15% tax provided for under the NIRC of 1997 would run counter to the very spirit and intent of the law and definitely will adversely affect foreign corporations' interest here in the Philippines and discourage them from investing capital in our country. 1 Such being the case, this Office is of the opinion and so holds that the dividends remitted by PMF to MFP are subject to the preferential rate of 15% pursuant to Section 28(B)[5](b) of the NIRC of 1997. ( BIR Ruling No. 008-00 dated January 5, 2000 ) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. DIAcTE Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner Legal Service