'Maximizing yields on dividend income - tax treaty or tax code?'

'Maximizing yields on dividend income - tax treaty or tax code?'

KPMG CORNER By Ana Liza K. Pural-andal (The Philippine Star)
Updated March 01, 2011 12:00 AM

Is the Euro-American financial crisis over? Economists have divergent views on the matter. Notably, the economic outlook for Asia remains optimistic that growth within the region will continue. As a result, investors are looking at the investment opportunities in Asia. Is the Philippines ready for this? Do Philippine companies offer yields that maximize return on investments (ROI)?

Inbound investors, particularly non-resident foreign corporations (NRFC) investing in equity, have to consider not only the financial stability of the business entity in which an investment will be made but also the taxes applicable to dividends to be received. The importance of tax planning has to be emphasized as NRFC’s dividend income is generally subject to 30 percent final withholding tax (FWT). A lower rate may be possible under the provisions of the tax treaty or the tax sparing provisions of the Tax Code but availment of lower tax rate is subject to stringent requirements being imposed by Philippine tax authorities.

The Bureau of Internal Revenue (BIR) currently requires that a tax treaty relief must first be procured with the International Tax Affairs Division (ITAD) before applying the preferential tax rates on dividends under the different tax treaties. Failure to make such an application with the BIR-ITAD shall subject the NRFC’s dividend income to 30 percent FWT. The BIR’s present position finds support in the Court of Tax Appeals case affirmed by the Supreme Court with a justification that such requirement will prevent any erroneous interpretation and/or application of the treaty provisions with which the Philippines is a signatory to.

Bolstered by the Supreme Court’s earlier affirmation of the tax treaty relief requirement, the BIR issued Revenue Memorandum Order (RMO) No. 72-2010 dated Aug. 25, 2010 which provides guidelines on the processing of tax treaty relief applications (TTRA) pursuant to existing Philippine tax treaties.

An applicant filing a TTRA for dividend income should accomplish BIR Form No. 0901-D together with the following general documentary requirements: (1) Proof of Residency issued by the tax authority of the country of the income earner to the effect that such income earner is a resident of such country for purposes of the tax treaty being invoked in the tax year concerned; (2) Articles of Incorporation or equivalent Fact of Establishment/ Creation/Organization); (3) Special Power of Attorney; (4) Certification of Business Presence in the Philippines; and (5) Certificate of No Pending Case. The documents executed abroad should be notarized and authenticated by the Philippine consulate or embassy in the place of execution.

In addition, RMO 72-2010 requires the submission of the following specific documents for dividend income: (1) Certified copy of Board of Investments registration (if applicable) of the payor of the dividends, including a Sworn Statement that such registration has not been cancelled at the time of the transaction; and (2) Certification from Corporate Secretary showing all the following information: (a) Details of dividend declaration (with attached related Board Resolution); (b) Number, value and type of shares of the nonresident income earner as of the date of record/transaction, and as of the date of payment of the subject dividends; (c) Percentage of ownership of the nonresident income earner as of the date of record/transaction, and as of the date of the payment of subject dividends; (d) Acquisition date(s) of the subject shares; and (e) Mode of acquisition of the subject shares.

A highlight of the subject RMO is Section 14 which provides that the filing of TTRA should always be made before the transaction. Transaction for purposes of TTRA filing shall mean before the occurrence of the first taxable event. Failure to properly file the TTRA with ITAD within the period prescribed shall have the effect of disqualifying the TTRA under this RMO.

The current interpretation of the BIR of RMO No. 72-2010 is that ITAD certification is necessary prior to every dividend pay-out even if the dividends is from the same Philippine company in the same calendar year.


 
In contrast, the tax sparing provision under Section 28 (B)(5)(b) of the Tax Code provides for a preferential FWT rate of 15 percent on the amount of cash dividends received from a domestic corporation. Revenue Memorandum Circular (RMC) No. 80-91 dated Aug. 12, 1991 provides the following documentation requirements to subject the dividends received by the NRFC to the 15 percent preferential FWT rate: (1) To show the actual amount credited by the foreign government against the income tax due from the non-resident foreign investor-stockholder (head office abroad) on the dividends received from a domestic corporation; (2) To present the income tax return of its mother company for the taxable year when the dividends were received; and (3) To submit any authenticated document showing that the foreign Government credited 20 percent (now 15 percent) of the tax deemed paid in the Philippines.

The existing interpretation of the said tax sparing provision is that the 15 percent preferential FWT applies even if the country in which the NRFC is domiciled grants tax exemption or does not impose a tax on the dividends remitted by a domestic corporation to such NRFC.

A highlight of the subject RMC is the absence of a period within which to comply with the documentation requirements for submission to the BIR. Revenue issuances and rulings on the subject provide for the submission of the documents to the BIR within a reasonable time.

The glaring difference between the processes involved in availing tax treaty relief against the tax sparing provisions of the Tax Code is interesting to note. Some in fact believes that the stringent requirements to avail lower tax rates involve cost and time which can discourage foreign investors. For NRFCs with equity investments in the Philippines, you may want to consider whether to be taxed based on a lower rate either under the tax treaty or the Tax Code.

(Ana Liza K. Pural-Andal is an Assistant Manager for Tax of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email manila@kpmg.comor apural-andal@kpmg.com)

--
---------------------------------------------
CARLOS ANI - SEEDFINANCE Corporation - http://www.seedfinance.net
Email: carlosani@seedfinance.net
Landline: +63495010127 Cellphone: +639152919580
DEVJOBS - http://www.devjobsmail.com
PHILDEVFINANCE - http://phildevfinance.posterous.com http://phildevfinance.wordpress.com
CONSULTING - http://www.carlosani.com
My Clippings - http://www.myclipps.posterous.com
------------------------------------------