As far back as the 1970’s, nonresident foreign corporations (NRFCs) have been incentivized to do business and invest in various industries in the Philippines. Incentives, fiscal or otherwise, continue to be introduced as globalization becomes the norm.
One of the longest-standing incentives is the tax sparing provision written in Section 28(B)(5)(b) of the National Internal Revenue Code, as amended. It provides for a lower tax rate on NRFC’s dividends paid by domestic corporations. The incentive is enjoyed upon meeting what may be viewed as a condition simple enough to consider the deal a good bargain, or even an attractive one. The tax rate is halved to 15% so long as the NRFC’s country of residence shall allow the NRFC a tax credit for taxes deemed to have been paid in the Philippines. The details of this condition were elaborated by the Supreme Court in a 1991 landmark case involving a multi-national corporate giant.
Both the pertinent Tax Code provision and the mentioned case substantially form part of BIR’s Revenue Memorandum Order (RMO) No. 46-2020 dated 23 December 2020. The RMO is titled “Guidelines and Procedures for the Availment of the Reduced Rate of 15% on Intercompany Dividends Paid by a Domestic Corporation to a Non-resident Foreign Corporation Pursuant to Section 28(B)(5)(b) of the National Internal Revenue Code of 1997, as amended.” This much needed and much appreciated issuance aims to simplify the availment of the reduced tax rate and the manner of confirming a corporation’s entitlement to such rate. It was also issued to bring more life to the provisions of the Ease of Doing Business and Efficient Government Service Act of 2018.
Before delving into the guidelines and procedures of the RMO, the BIR included in the objectives the discussion of the three key takeaways of CIR v. Procter & Gamble Philippine Manufacturing Corporation (G.R. No. L-66838, 2 December 1991). First, the NIRC does not require that the “deemed paid” tax credit shall have been actually granted before the reduced tax rate may be availed of. It merely requires that the country to which the NRFC belongs “shall allow” a credit against the tax due from the NRFC for taxes deemed to have paid in the Philippines. Second, upon determination or recognition of the applicability of the reduced tax rate, the BIR may require NRFCs to certify to the BIR the amount of the “deemed paid” tax credit. Finally, implementing regulations could provide that failure to submit the required certification within a certain time period would result in the imposition of deficiency tax assessment.
RMO No. 46-2020 states that the reduced rate of 15% may be applied to cash and/or property dividends declared by corporations, irrespective of their corporate income tax regimes. Hence, all corporations may be entitled to such rate whether they pay the regular rate of 30% or other rates in the Tax Code, or whether granted an income tax holiday or covered by a special tax regime. If the NRFC is not entitled to the reduced rate under the Tax Code, the pertinent treaty rate shall be automatically applied if entitlement to the same shall have been duly proven.
The RMO also allows the domestic corporation’s outright remittance of dividends to the NRFC and the application of the reduced rate sans a BIR ruling to that effect. However, this is subject to the condition that the domestic corporation determines whether the prevailing law of the NRFC’s domicile country allows a “deemed paid” tax credit.
The “deemed paid” tax credit must be equivalent to the 15% waived by the Philippines or must make the dividends received tax-exempt. The NRFC or its authorized representative is nonetheless still required to file a request for confirmation of the applicability of the 15% dividend rate. It is requested through the BIR’s International Tax Affairs Division (ITAD) within 90 days from the remittance of the dividends or from the time the foreign tax authority determines a deemed paid tax credit or a tax exemption, whichever is later. If the NRFC’s entitlement to the reduced rate is confirmed, the BIR shall issue a certification duly signed by the Assistant Commissioner for Legal Service in lieu of the BIR ruling. This step is mandated by the RMO to streamline the process of confirming entitlement to the reduced rate.
In case of denial to the entitlement of the reduced rate, a BIR ruling containing the factual and legal bases that led to such conclusion shall be issued. The denial may result in the imposition of deficiency assessment for the 15% differential plus penalties. Unfavorable rulings are appealable to the Department of Finance within 30 days from receipt of the same.
Other salient pronouncements of the RMO include the express statement as to the entitlement of holders of Philippine Depositary Receipts (PDRs) to the reduced rate of 15%. Such entitlement is premised on the inference that a PDR holder may likewise be considered a shareholder, given the latter’s statutory definition.
The RMO likewise defines a PDR as a document that gives its holder either of the two rights: (i) the right, but not an obligation, to purchase the underlying shares at a specified price, or (ii) the right to the delivery of the sales proceeds of the underlying shares. It is important to note that a PDR holder cannot exercise the first right if the underlying shares cannot be legally owned by a non-Philippine national. In such case, the non-Philippine PDR holder cannot compel the delivery of the underlying shares but is obliged to accept instead the monetary value or sales proceeds of these shares.
A typical PDR entitles its holder to the dividends accruing to the underlying shares. However, the application of the reduced tax rates on such dividends depend on the nature of the PDRs and on meeting two conditions. These conditions are: first, the PDR is coupled with a right to purchase the underlying shares; and second, the said right can be legally exercised. The second condition requires that the option to purchase be exercised in compliance with the Constitution and special laws reserving ownership and operation of certain companies to Filipinos. It is worth reiterating that a foreign PDR holder will only be entitled to the monetary value or sales proceeds of the underlying shares if ownership of the same is reserved to Philippine nationals.
The RMO likewise provides a list of all documentary and special requirements for the stakeholders’ convenience. There is also a disclaimer as to the BIR’s right to require or request additional documents or copies of such documents. More importantly, the BIR added a penal clause to guarantee compliance with the provisions of the RMO, pertinent provisions of the Tax Code, and existing revenue issuances.
As mentioned, the tax sparing provision has been around for decades. It started out as a Presidential Decree and eventually evolved into one of provisions in the National Internal Revenue Code and its amendments. It is about time that the BIR release an issuance guiding everyone concerned on how to best derive benefits from this provision. What makes the RMO more timely is the needed economic boost that the Philippines needs to slowly but sustainably rise above the effects of the pandemic. May this RMO serve as a model in promoting the inflow of foreign equity investments while still abiding by the Constitution and other laws. May this also serve as a reminder that exerting efforts towards economic growth on the one hand, and following legal mandates on the other, are not mutually exclusive.
Maria Luisa J. Sebastian is a Supervisor from the Tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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