ITAD Ruling No. 088-04

August 20, 2004 ITAD RULING NO. 088-04 Sec. 28 (B) (5) (b) of the NIRC of 1997 BIR Ruling No. ITAD-189-00 Picazo Buyco Tan Fider & Santos Law Offices 18th, 19th & 17th Floors, Liberty Center 104 H.V. dela Costa Street Salcedo Village, Makati City Attention: Ms. Ma. Adelina S. Gatdula Gentlemen : This refers to your letter dated June 4, 2004, on behalf of your client ITW TEXWIPE PHILIPPINES, INC. (ITW-Phil), requesting confirmation of your opinion that an American resident company which receives cash dividends from a domestic corporation is entitled to avail of the preferential tax rate provided for under the National Internal Revenue Code of 1997 (NIRC of 1997) in relation to the Philippines-United States of America tax treaty. It is represented that ILLINOIS TOOL WORKS INC. (ITW-US) is a nonresident foreign corporation duly organized and existing under the laws of the United States of America (USA) with principal office at 3600 West Lake Avenue, Glenview, Illinois 60025, USA; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per certification issued by the Securities and Exchange Commission dated April 15, 2004; that ITW-Phil is a corporation organized and existing under the laws of the Philippines with principal office at 4 Circuit Street, LISP l, SEPZ, Bgy. Diezmo, Cabuyao, Laguna; that ITW-US owns 99.99% of the issued and outstanding capital stock of the ITW-Phil as of November 30, 2003, February 20, 2004 and as of June 4, 2004; that on February 20, 2004, the Board of Directors of ITW-Phil declared cash dividends, in the amount of One Hundred Ninety Million Four Hundred Thousand Pesos (P190,400,000) out of its unrestricted retained earnings in the amount of Three Hundred Eleven Million Eight Hundred Fifteen Thousand Six Hundred Thirty Pesos (P311,815,630) available in its books as of November 30, 2003, to all stockholders of record as of the date of dividend declaration in proportion to their respective shareholdings therein. In reply, please be informed that Section 28(B)(5)(b) of the NIRC of 1997 provides: Section 28. Rates of income tax on foreign corporation. "xxx xxx xxx" "(B) Tax Nonresident Foreign Corporations. "xxx xxx xxx" "(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. SITCEA "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 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 fifteen percent (15%) tax on dividends as provided in this subparagraphs; "xxx xxx xxx" Based on the foregoing, the regular income tax rate of thirty-two percent (32%) applicable to dividend remittances to nonresident foreign corporate stockholders of a Philippine corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines. In other words, in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA shall allow tax credit in favor of ITW-US for "taxes deemed paid in the Philippines" against its US taxes. The Supreme Court in Commissioner of Internal Revenue vs. Procter and Gamble Philippine Manufacturing Corp. (PNG) and Court of Tax Appeals (December 2, 1991), in ruling that the USA domiciled stockholders of PNG is entitled to the preferential fifteen percent (15%) dividend tax rate, further declared that the NIRC, as amended, does not in fact require that the "deemed paid" tax credit shall actually been granted but merely that the country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for "taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. Such being the case, and in conformity with the aforementioned Supreme Court decision, your opinion that the dividends to be remitted by your company to ITW-US are subject to the preferential tax rate of 15 percent pursuant to the provisions of the Tax Code of 1997 is hereby confirmed. ( BIR Ruling No. ITAD-189-00 dated December 7, 2000 ) However, ITW-Phil is required to submit to this Bureau an authenticated certification of the amount of the "deemed paid" tax credit actually and subsequently granted by the U.S. tax authorities to ITW-US for the taxable year involved. Failure to submit the said certification within a reasonable time would result in the imposition of a deficiency assessment for the seventeen (17) percentage points differential. This ruling is issued on the basis of the foregoing facts represented. However, if upon investigation, it will 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.) MILAGROS V. REGALADO Assistant Commissioner Legal Service