ITAD Ruling No. 124-04

November 3, 2004 ITAD RULING NO. 124-04 Section 28 (B) (5) (b), National Internal Revenue Code of 1997 BIR Ruling No. 208-89 Sycip Gorres Velayo & Co . 6760 Ayala Avenue 1226 Makati City Attention: Mr. A.C. Tionko Tax Division Gentlemen : This refers to your letter dated September 10, 2004 requesting confirmation that dividends to be paid by Globe Telecom, Inc. (Globe Telecom) to Singapore Telecom International Pte. Ltd. (Singapore Telecom) are subject to 15 percent income tax pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997 (Tax Code). It is represented that Singapore Telecom is a foreign company organized and existing under the laws of Singapore with principal office at 31 Exeter Road, Comcentre, Singapore 239732, as confirmed by its Articles of Association; that, on the other hand, Globe Telecom is a domestic company organized and existing under the laws of the Philippines with principal office at 3rd Floor, Globe Telecom Plaza, Pioneer corner Madison Streets, 1552, Mandaluyong City, Philippines; that, as of June 30, 2004, Singapore Telecom owns 56,036,015 or 40.05 percent of the issued and outstanding common shares of stock of Globe Telecom with a par value of P50.00 each, as confirmed by the notarized certificate dated July 27, 2004 issued by the Corporate Secretary of Globe Telecom ;and that Singapore law provides that dividends derived by a resident of Singapore, beginning June 1, 2003 and onwards, from sources outside Singapore, are exempt from Singapore income tax if the income tax imposed by the source country on such dividends is equal to or greater than 15 percent, as confirmed by the relevant letter dated August 30, 2004 of the Inland Revenue Authority of Singapore to Singapore Telecom . DHSEcI In reply, please be informed that Section 28(B)(5)(b) provides as follows: "(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." Section 28(B)(5)(b) states that dividends to be paid by Globe Telecom to Singapore Telecom ,beginning year 2000 and onwards, are subject to 15 percent Philippine income tax if the latter's country of domicile, Singapore, shall allow Singapore Telecom a 17 percent deemed paid tax credit against its Singapore income tax due on such dividends. The Supreme Court (SC),on two separate occasions, had ruled on the applicability of the 15 percent income tax on dividends, first, in Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals (G.R. No. L-68375, April 15, 1988) and, second, in Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation (G.R. No. 66838, December 2, 1991). In the first SC decision, Wander Philippines, Inc. (Wander),a domestic corporation, remitted dividends to Glaro S.A. Ltd. (Glaro),a nonresident foreign corporation domiciled in Switzerland. Under Swiss law, dividends derived by Glaro from sources outside Switzerland are exempt from Swiss income tax. Given this, the Supreme Court ruled that the subject dividends were subject to 15 percent income tax by reason that such exemption of dividends in Switzerland would, in effect, allow Glaro not only the required (minimum) 20 percent deemed paid tax credit but, also, full tax credit on such dividends. On the other hand, in the second SC decision, Procter & Gamble Philippine Manufacturing Corporation (P&G Philippines),a domestic corporation, remitted dividends to Procter & Gamble Company, Inc. (P&G U.S.A.),a nonresident foreign corporation domiciled in the U.S.A. Under U.S. law, dividends derived by P&G U.S.A. from sources outside the U.S. are allowed U.S. tax credits equivalent to the sum of the Philippine income tax actually paid on the dividends by P&G U.S.A. and the deemed paid tax credit proportionate to the corporate income tax actually paid by P&G Philippines. Given this, the Supreme Court ruled that the subject dividends were subject to 15 percent income tax only if the total U.S. income tax credits on such dividends were equal to or greater than the required (minimum) 20 percent deemed paid tax credit. Applying the pronouncement in the case of Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals ,and since Singapore law provides that dividends derived by a resident of Singapore, beginning June 2003 and onwards, from sources outside Singapore, are exempt from Singapore income tax if the income tax imposed by the source country on such dividends is equal to or greater than 15 percent, and since Philippine income tax on such dividends is 15 percent under Section 28(B)(5)(b) or 32 percent under Section 28(B)(1) 1 of the Tax Code, dividends to be paid by Globe Telecom to Singapore Telecom , beginning June 1, 2003 and onwards, are therefore subject to 15 percent Philippine income tax pursuant to Section 28(B)(5)(b) of the Tax Code. (BIR Ruling No. 208-89 dated September 28, 1989) 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. TIDcEH Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Assistant Commissioner, Legal Service Footnotes 1. "(1) In General . Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends ,rents, royalties, salaries, premiums (except reinsurance premiums),annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to subparagraphs 5(c): Provided ,That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%);effective January 1, 1999, the rate shall be thirty-three percent (33%);and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%)."