Tax Sparing

In a corporate world, dividends is not a new topic.
As a matter of fact, it is one of

the major consideration for an investor to purchase shares of stock of a company. It
represents the share in the net earnings distribution of a stockholders who own
shares of stocks of a company. It could be in the form of cash, property, company's
own shares or stock dividends and liquidating dividends upon liquidation and
dissolution. It is basically sourced from the unrestricted or free retained earnings of
the company made available through an action of the Board of Directors.
Taxability of cash and/or property dividends would normally depend on the

classification of the company and the recipient stockholders. Company for
determining tax on dividends may be classified as either a domestic corporation or
as a foreign corporation. Stockholders may be classified as either an individual or a
corporation, and the latter may further be classified as a domestic corporation,
resident foreign, and non-resident foreign corporation. Determining the
classification would depend on the state where the same is organized or constituted
and existing. Domestic corporations are those organized and existing under the
laws of the Philippines. Those organized and existing under the laws other than the
Philippines are referred to as foreign corporation. Foreign corporations doing
business in the Philippines are normally classified as resident foreign corporation,
otherwise, the same shall be referred to as a non-resident foreign corporation.
Dividends distributed by a DOMESTIC corporation to the following stockholders are

taxed as follows:
* Individuals, whether Pinoy or not, is subject to 10%;

* Domestic corporations - exempt;
* Resident foreign corporation - EXEMPT from income tax; and
* Non-resident foreign corporation - 15% subject to the rule on tax-sparing credit
and/or Tax Treaty rules
On the other hand, dividends distributed by a FOREIGN corporation to the following

stockholders are taxes as follows:
* Pinoy individuals residing in Philippines is subject to 5-32% normal income tax;
* Pinoy individuals not a resident of the Philippines is EXEMPT from income tax;
* Domestic corporations subject to 30% corporate income tax;
* Resident foreign corporation is EXEMPT from income tax; and
* Non-resident foreign corporation is EXEMPT from income tax.
Stock dividends are, as a rule EXEMPT from income tax as there is no flow of wealth
to the stockholder before and after the stock dividend. The increase in the number
of shares as a result of the stock dividend is not necessary income until after such
shares are actually sold. However, if such stock dividend distribution would
constitute as an income distribution (e.g. increase in the equity percentage of a
stockholder), then, the same shall be taxed in the same manner above.
Taxes affects lives, dare to care for taxes and save lives! Click here for more.
Tax sparing credit by: Jean Ross Abenasa -Miso

Through the years, foreign investment in Philippine domestic companies through
shareholdings provides a significant factor in the countrys economic growth. Like
their local counterparts, foreign investors acquire shares as incorporators and/or
stockholders in newly-registered and existing domestic stock corporations and
domestic partnerships, and receive a return of their investments in the form of
dividends, which is a taxable income under Philippine tax laws.
Section 28 (B)(1) and (5)(b) of the National Internal Revenue Code (Tax Code) of
1997 provides in general that a foreign corporation not engaged in trade of business
in the Philippines is subject to the thirty percent (30%) tax on gross income received
during each taxable year from dividends derived within the Philippines.
Nevertheless, the same Tax Code provision states that the foreign corporation shall
be subject to a final withholding tax (FWT) at the rate of fifteen (15%) percent on
the amount of cash and/or property dividends received from a domestic corporation,
provided that the country in which it is domiciled, shall allow a credit against the tax
due from it 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 (35%) and the fifteen percent (15%) tax on dividends.
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.
In recent years, the grant of this preferential tax rate became the subject of
administrative and judicial claims for refund or issuance of a tax credit certificate
(TCC). But when does a non-resident foreign corporation become entitled to the
15% FWT rate? Does it need a prior ruling from the Bureau of Internal Revenue
(BIR) in order to avail of this benefit? These issues were squarely addressed by the
Court of Tax Appeals in the very recent case of Interpublic Group of Companies, Inc.
vs. Commissioner of Internal Revenue (CTA Case No. 7796 dated February 21,
2011).
In this case, a US corporation which owns thirty percent (30%) of the total and
outstanding voting capital stock of a Philippine advertising company filed a claim for
the refund or issuance of a TCC for overpaid FWT on dividends withheld and
remitted by the Philippine company. In the administrative claim, the US corporation
alleged that, as a non-resident foreign corporation, it may avail of the preferential
FWT rate of 15% on cash dividends received from a domestic corporation during the
taxable year 2006, pursuant to Section 28 (B)(1) and (5)(b) of the Tax Code of 1997.
The Commissioner of Internal Revenue (CIR), for her part, maintained that in an
action for refund, the burden of proof is on the taxpayer to establish its right to
refund and the failure to sustain the burden is fatal to the claim. Among others, the
CIR raised the question of whether petitioner is entitled to the FWT at the rate of
15% under Section 28 (B)(1) and (5)(b) of the Tax Code of 1997, or at the rate of
20% in accordance with the RP-US Tax Treaty. Moreover, petitioners transactions
were bereft of a tax treaty relief application with the International Tax Affairs
Division (ITAD) in accordance with Revenue Memorandum Order (RMO) No. 1-2000.
Citing the Supreme Courts decision in Commissioner of Internal Revenue vs. Procter
& Gamble Philippine Manufacturing Corporation and the Court of Tax Appeals (G.R.
No. 66836, dated December 2, 1991), the CTA explained that Section 24(b)(1) of the
Tax Code of 1977 (now Section 28 (B)(1) and (5)(b) of the Tax Code of 1997) does
not require that the US tax law must give a deemed paid tax credit for the
dividend tax (20 percentage points) waived by the Philippines in making applicable
the preferred dividend tax rate of 15%. The Tax Code does not require that the US
law deem the parent-corporation to have paid the 20 percentage points of dividend
tax waived by the Philippines. The Tax Code only requires that the US shall allow
the US corporation a deemed paid tax credit in an amount equivalent to the 20
percentage points waived by the Philippines. The Court stated further that both
(i) the tax credit for the Philippine dividend tax actually withheld and (ii) the tax
credit for the Philippine corporate income tax actually paid by the Philippine
domestic corporation but deemed paid by the US corporation are tax credits
available or applicable against the US corporate income tax of the US corporation.
Thus, the CTA concluded that if the country of domicile of the recipient corporation
allows a credit against the tax imposable by it an amount equivalent to 20% of the
dividends remitted from a Philippine domestic corporation to corporations domiciled
therein, the dividends remitted are subject to FWT at the preferential rate of 15% in
accordance with Section 28 (b)(5)(b) of the Tax Code of 1997, as amended. As
previously confirmed by the BIR in ITAD Ruling Nos. 175-00 and 097-06, dated
November 14, 2000 and August 25, 2006, respectively, a corporation which was
incorporated under the US laws, is subject to 15% FWT rate of the amount of
dividend received based on Section 28 (B)(1) and (5)(b) of the Tax Code of 1997, as
amended. (N.B. The FWT on dividends on Philippine-source dividends derived by a
nonresident foreign corporation shall be reduced to 15% if the country of domicile of
the nonresident foreign corporation receiving the dividends allows (as a credit
against the tax due in the recipient's home country) a deemed paid tax equivalent
to 15% beginning January 1, 2009.)
On the issue of whether a prior tax treaty relief application with the ITAD is required
before filing an administrative claim for tax refund, the CTA ruled that the same is
not necessary, stating that the basis of the claim for refund is Section 28 (B)(1) and
(5)(b) of the Tax Code of 1997, as amended. The CTA went further to state that,
even with respect to the applicability of the 20% FWT under the RP-US Tax Treaty, a
tax treaty relief application is not made a condition precedent by law.
With this pronouncement, would it be correct to conclude that the applicability of

the 15% preferential tax rate under aforementioned Tax Code provision
automatically extends to US corporations, such that no prior tax treaty relief
application is required relating to this type of income payment? The Interpublic
case presents an interesting precedent for future administrative and judicial claims
for tax refund or issuance of TCC, especially those involving US shareholders in

Philippine companies.

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In a corporate world, dividends is not a new topic.

As a matter of fact, it is one of

Taxability of cash and/or property dividends would normally depend on the

Dividends distributed by a DOMESTIC corporation to the following stockholders are

* Individuals, whether Pinoy or not, is subject to 10%;

On the other hand, dividends distributed by a FOREIGN corporation to the following

* Pinoy individuals residing in Philippines is subject to 5-32% normal income tax;

Tax sparing credit by: Jean Ross Abenasa -Miso

With this pronouncement, would it be correct to conclude that the applicability of

for tax refund or issuance of TCC, especially those involving US shareholders in

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