ITAD Ruling No. 072-05

July 21, 2005 ITAD RULING NO. 072-05 Section 28 (B) (5) (b), National Internal Revenue Code of 1997; BIR Ruling No. 105-92 Platon Martinez Flores San Pedro & Leao 6th Floor, Tuscan Building 114 Herrera Street, Legaspi Village Makati City Attention: Atty. Carlos G. Platon Gentlemen : This refers to your letter dated August 9, 2004 (endorsed by the Law Division to the International Tax Affairs Division on February 21, 2005) requesting confirmation that dividends to be paid by Havi Food Services Philippines, Inc. (Havi Philippines) to The Havi Group Limited Partnership (Havi U.S.A.) are subject to the 15 percent income tax pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 (Philippine Tax Code). It is represented that Havi U.S.A. (formerly, TFP Acquisition L.P. and Perlman Acquisition L.P. ) is a nonresident foreign corporation organized and existing Under the laws of the United States of America with principal office at 3010 Highland Parkway, Suite 400, Downers Grove, Illinois 60515, United States of America; that Havi U.S.A. is not registered either as a corporation or as a partnership licensed to engage in business in the Philippines, as confirmed by the Certification of Non-Registration dated July 5, 2004 issued by the Securities and Exchange Commission; that, on the other hand, Havi Philippines is a domestic corporation organized and existing under the laws of the Philippines with principal office at Sumulong Highway, Marikina City, Philippines; that Havi Philippines is primarily engaged in the business of warehousing and transporting food, food products, and other related goods and merchandise; and that Havi Philippines has an authorized capital stock of Thirty Million Pesos (P30,000,000.00) divided into 30,000 shares with a par value of 1,000 pesos each, where 7,500 are outstanding and issued to Havi U.S.A. (7,495 shares or 99.93 percent) and to five individual directors of Havi Philippines (five shares, one for each). In reply, please be informed that Section 28(B)(5)(b) of the Philippine Tax Code of 1997 provides as follows: "(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;" THAECc Applying the above provisions to the case at hand, dividends to be paid by Havi Philippines to Havi U.S.A., beginning at least in the year 2000 and onwards, are subject to 15 percent income tax if the latter's country of domicile (namely, the United States), shall allow Havi U.S.A. a credit against the tax due from it taxes deemed to have been paid in the Philippines equivalent to 17 percent, which represents the difference between the regular income tax of 32 percent and the 15 percent reduced income tax on dividends. As a background, the allowance for a 17 percent credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines (commonly, deemed paid taxes credit) seeks to mitigate "economic" double taxation of dividends in the Philippines, first, in the hands of the domestic corporation paying the dividends as profits subject to corporate income tax, and, second, in the hands of the nonresident foreign corporation receiving them as dividends subject to dividends income tax. In Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corporation and the Court of Tax Appeals (G.R. No. 66838 dated December 2, 1991), the Supreme Court had the occasion to rule, among other things, on the condition of complying with the deemed paid taxes credit requirement as it took into account the relevant tax law of the nonresident foreign corporation's (Procter and Gamble Company, Inc.) country of domicile (the United States). Under Section 902 of the United States Tax Code, a United States corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall, to the extent such dividends are paid by such foreign corporation out of accumulated profits of a year for which such foreign corporation is a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits. The same proportion of income taxes deemed to have been paid by the United States corporation on dividends derived from the foreign corporation's profits subject to corporate income tax in the foreign country is given by the following formula: Dividends actually remitted by the foreign corporation to the United States corporation Corporate income tax paid by the x foreign corporation Amount of profits earned by the foreign corporation in excess of income tax To illustrate this point, on the fact that Havi U.S.A. owns at least 10 percent of the voting stock of Havi Philippines and Havi Philippines is a corporation in a less developed country, if Havi Philippines has profits of 100 pesos and subject to 32 percent income tax, 68 percent of these (68 pesos) are available as dividends of Havi U.S.A. Where the dividends are subject to the reduced 15 percent income tax, the dividends remitted to Havi U.S.A. are 57.80 pesos and the said proportion under the United States Tax Code are 27.20 pesos ([57.80]/[68.00] x 32.00). This means that Havi U.S.A. (including other United States corporations in the same circumstances) is allowed a United States tax credit of up to 40 percent (27.20/68.00) on income derived from foreign sources. In the subject ruling, the Court had taken synonymously the said proportion under the United States Tax Code with the deemed paid taxes credit under the Philippine Tax Code, and the Court had ruled that if the said proportion is equal to or higher than the deemed paid taxes credit, the 15 percent reduced rate is applicable. Thus, since the said proportion under the United States Tax Code of 40 percent is higher than the 17 percent deemed paid taxes credit under the Philippine Tax Code, dividends to be paid by Havi Philippines to Havi U.S.A. , including those paid by domestic corporations to other United States corporations under the same circumstances, are subject to 15 percent income tax pursuant to Section 28(B)(S)(b) of the Philippine Tax Code. (BIR Ruling No. 105-92 dated March 30, 1992). aTEHIC 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner, Legal Service