RMO No. 46-2020 — Prescribes the 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 NIRC of 1997, as amended Digest | Full Text

HHxrllu ffii REPT]BLIC OF THE PHILIPPNES A DEPARTMENT OF FNANCE t4 2 BUREAU OF INITERNAL REVENUE ? 3 ntc 2020 4b- REVENUE MEMORAI\DUM ORDER N[O. Lol-O SUBJECT: Guidelines and Procedures for the Availment of the Reduced Rate of l5% on Intercompany Dividends Paid by a Domestic corporation to a Non-resident Foreign corporation Pursuant to Section zs(BXsXb) of the National Internal Revenue Code of 1997, as Amended. TO All Internal Revenue Officers and Others Concemed SECTION l. Background, - Under Section 28(BX5Xb) of the National Intemal Revenue Code (NIRC or Tax Code) of 1997, as amended, intercorporate dividends paid by a domestic corporation to a nonresident foreign corporation (NRFC) are subject to income tax of 15% provided that the country of residence of the NRFC shall allow a credit against its tax due taxes deemed to have been paid in the Philippines equivalent to fifteen percent (15%), which represents the difference between the regular tax of 30o/o on corporations and the reduced tax of l5%o on dividends. l, This lower tax was introduced in Presidential Decree No. 369 on January 1974 as an amendment to Section 2a@) of the 1939 Tax Code with the aim of encouraging more capital investment for large projects in the Philippines. This provision was codified later in the Tax Code of 1977 and has been retained in the current Tax Code of 1997,as amended. To borrow the words of the Supreme Court in the case of Commissioner of Internal Revenue vs. Procter & Gamble Philippine Manufacturing Corporation & The Court of Tax Appeals, G.R. No. L-66838, December2,lggl (the p&G case), sectioh 24(b)(l) [norv Section 28(BX5Xb)], NIRC, seeks to promote the in-flow of foreign equity investment in the Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the investor. The foreign investor, however, would not benefit from the reduction of the Philippine dlvidend tax rate unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax credits which would be applicable against the tax payable to such home country. Accordingly, Section 24(b)(l) [now Section 2s(B)(5)(b)], NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least equal in amount to the twenty (20) percentage points (now 15%) of dividend tax foregone by the Philippines, in the assumption that a positive incentive effect would thereby be felt by the investor.

- SECTIONI 2. Objectives. Essentially, the Court held in the p&G case that: i' Section 24(bXl) [now Section 28(B)(5)(b)], NIRC, does not in fact require that the "deemed paid" tax credit shall have actually been granted before the applicable oiyfoeno tax rate goes down from thirty-five percent (35%) to fifteen percent (15%). It merely requires that the USA "shall allow" a credii against the iax due from [P&G-usA for] taxes deemed to have been paid in the philippines. ii. The question of whether or not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required amount relates to the administrative implementation, which is not properly imposed as a condition for the applicability, as a matter of law, of a particular tax iate. on the other hand, upon the determination or recognition of the applicability of the reduced tax rate, there.is nothing to prevent the BIR from issuing implementing regulations that would-req+ke-P&G-Phil; oranyother simllarty-iituate#phi lippine-corporationr - for that matter, to certiSr to the BIR the amount of the "deemed paid,' tax credit actually and subsequently granted by the US tax authorities to p&G-usA or a US parent corporation for the taxable year involved. iii' Since the US tax laws can and do change, such implementing regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time, would result in the imposition of a deficiency assessment for the twenty (20) percentage points (now l5%) differential. This Order, therefore, seeks to provide guidance for the NRFCs intending to avail of the reduced tax rate on intercorporate dividends received bfreomsuabdmoimtteesdticin"os.uppopriotiortno, fanthdetior lay down the documentary requirements that must application. view It also aims to simplif,, the manner of confirming entitlement to the reduced rate in and Efficient Government Service of the implementation of the Ease of Doing Businesi Delivery Act of 2018. - SECTION 3. Guidelines and procedures. An NRFC applying for the reduced rate must be guided by the foilowing: 'l The reduced rate of l5%o may be applied to the cash and/or property dividends declared by all co^rporalions, irrespective of their corporate income iax regimes (i.e. regular rate of 30Yo or other rates under the Tax iode, or whether grunt-"d un income tax holiday or covered by special tax regimes). 2. The domestic corporation paying the dividends may remit outright the dividends to the NRFC and apply thereon the reduced rate of 15% without securing first a ruling from the Bureau of Internal Revenue (BIR). It must determine, however, whether the existing law of the'country of domicile allows the NRFC a "deemed paid" tax credit in an amount equivalent to the l5% waived by the Philippines or exempts from tax the dividends received. EVE r

J'). Existence of a foreign law is a question of fact. Philippine courts do not take law. A foreign law, however, can be established by iualciat notice of a ioreign and 25, Rule 132 of the Revised Rules of Sections 24 complying with the mandate ofCourt is regards certification and authentication ofa copy thereof'l In case the country of OJmicite of the NRFC is a member of the Apostille Convention' a foreign law can also be established by submitting an apostilled copy thereof in lieu of the required certification and authentication' 4. Within ninety (90) days from the remiffance of the dividends or from the the foreign tax authority of the deemed paid tax credit/non- determination Uy because of tn" exemption, whichever is later, the NRFC or its imposition of tax the BIR, through the lnternational Tax auihorized representative shall file with Affairs Division (ITAD), a request for confirmation of the applicability of the reduced dividend rate of l5%. 5. Holders of pDRs may also be entitled to the reduced rate, subject to fulfillment of the cond itions set ou$ heretlnden*- 6. To streamline the process of confirming entitlement to the reduced rate, the BIR shall issue a certification duly signed by the Assistant Commissioner for Legal Service in lieu of the usual BIR ruling. The ITAD shall always ensure that a loose documentary stamp provided by the ipplicant is affixed on the Certificate before releasing it. cIrenopncrcealssueesniootanft,idvees,nhiawallhl, ibacehBisIsRhsaurleludcli.onSngtuasciinhgntdehed.nbifaayl.ttmuhaealyCaornemdsmuleligtssainilobntaehsreeosirmthhpaisotsalietuidothnotoroiztfehdea deficiency assessment for the l5% differential, plus penalties. 5. All unfavorable rulings are appealable to the Department of Finance within thirty (30) days from receipl thereof pursuant to existing rules and regulations. SECTION 4. Option to Apply for the Reduced Dividend Rate under the Tax Code or Under the TreatY. - The NRFC may opt to avail of the reduced dividend rate under the Tax Code, exists between the Philippines irrespective of whetheia double tax convention or tax treaty the reduced rate under the Tax and its country of residence. If the taxpayer is not entitled to that the NRFC is able to prove Code, the treaty rate shall automatically be applied provided its entitlement to the benefits provided under the treaty' - SECTION 5. Philippine Depositary Receipts (PDRs)' by' a Section 73(A) of the Tax code defines the term "dividends" as any distribution made corporation to its shareholders out of its eamings or profits and payable to its shareholders. On the other hand, Section 22(M) thereof defines the term "shareholder" as holders of a share/s of stock, *urrunt/, undio. ortion/r to ,u..hut" .hu..t of tto"k of u corporation, &S well u, u noti.iof uTit ofuarticipation in a partnership (except general Geneviove Rosal Arrezav. Tetsushi Toyo. G.R. No. 213198. .luly 1- 2A19 INTERNAL RbvENUts m RECORDS MGT. DIVISION

professional partnerships) in a joint stock company, a joint account, a taxable joint venture, a member of an association, recreation or amusement club (such as golf polo or similar clubs) and a holder of a mutual fund certificate, a member in an association, joint-stock company, or insurance company. It may be infened from the foregoing definition that a holder of a PDR may likewise be considered as a shareholder. A PDR is a document that gives the holder thereof a right, but not an obligation, to purchase the underlying shares at a specified price, or the right to the delivery of the sales proceeds of the underlying shares. When the first right is exercised, the PDR holder becomes a shareholder. The PDR holder cannot exercise, however, the first right if the underlying shares cannot be legally owned by a non-Philippine national. In such caseo the PDR holder cannot compel the delivery of the underlying shares but is obliged to accept instead the proceeds ofthe sale ofthese shares. A--rypieal- PDR-also-entitles itrltolderto-thrdivideitdsaecruing ffihrrmdertying shares. For taxation purposes, these dividends may or may not be entitled to the reduced rate depending on the nature of the PDRs. In order to be entitled to the reduced rate, the following conditions must be met: i. the PDR is coupled with a right to purchase the underlying shares; and ii. the said right can be legally exercised. It is not enough that there is an option to purchase the underlying shares. What is more important is that the option to purchase can be legally exercised without violating the provisions of the Constitution and special laws, which restrict the ownership and operation of certain companies to Philippine nationals. Again, if the ownership of the underlying shares is reserved to Philippine nationals, the foreign PDR holder cannot legally exercise the right to purchase the underlying shares but is only entitled to the monetary value or sales proceeds thereof. - SECTION 6. Documentary Requirements. The following documents shall accompany the first application for the reduced dividend rate of l5o/o in a given taxable year: A. GeneralRequirements l. Letter-request which shall provide a background of the transaction, the relief sought and the legal basis; 2. Duly accomplished BIR Form No. 0901-TS; 3. Original copy of the apostilled/duly authenticated Tax Residence Certificate issued by the tax authority of the country of domicile; 4. Apostilled/duly authenticated copy of the NRFC's articles of incorporation or proof ofestablishment in its country of residence; 5. Original copy of apostillid/duly authenticated Special Power of Attorney (SPA) issued by the NRFC to its authorized representative; 6UHEAIJ fiF iNTEFNAL REVENUE J;EV P.M, / -S: RECORDS ISION

6. Certified true copy of the Board of Directors' resolution of the domestic corporation approving the issuance of dividends, which shall include the amount of dividends, and dates of declaration, record and payment, among others; 7. Original copy of the sworn statement executed by the corporate secretary of the domestic corporation/custodian banks/depository account holders/broker dealers stating the legal and beneficial owners, if applicable, of all issued and outstanding shares as of record date, their corresponding subscriptions, date/s of acquisition, percentage of ownership and the allocation of dividend; 8. Certified true copy of the General Information Sheet (GIS) of the domestic corporation for the year or period immediately preceding the date of declaration, whichever is more applicable. 9. Certified true copy of Audited Financial Statements (AFS) of the domestic corporation stamped "received" by the BIR and Securities and Exchange eommissirery'vdlioh warusod as the-basis"of sushdividenffiectaration;and 10. Proof of remittance of the dividend payments. B. Special Requirements If the dividend is taxable in the country of domicile l. Duly authenticated or apostilled copy of the law of the country of domicile allowing a tax credit for taxes actually paid in the Philippines and for taxes deemed paid in the Philippines equivalent to at least 15% of the dividends; and 2. Duly authenticated or apostilled copy of any document issued by, or filed with, the foreign tax authority showing the amount of deemed paid tax credit actually granted by the foreign tax authority. ii. If the dividend is exempt from tax in the country of domicile l. A duly authenticated or apostilled copy of the law of the country of domicile;and 2. A duly authenticated or apostilled copy of any document issued by the foreign tax authority confirming that the NRFC is exempt from income tax on dividends received from the Philippine corporation. For subsequent applications during the year involving the same NRFC l. Letter-request which shall provide a background of the transaction, the relief sought and the legal basis; 2. Duly accomplished BIR Form No. 0901-TS; 3. Original copy of the apostilled/duly authenticated Special Power of Attorney (SPA) issued by the NRFC to its authorized representative, if there is a change in the previous SPA; 4. Ci:rtitieO copy of the Board of Directors' resolution of the domestic corporation approving the issuance of dividends, which shall include the SF f f,t'fERNAL R EVh NUts /2W:wstPr,r1u4, DEC e8m m RECORDS MGT. rsro N

amount of dividends, and dates of declaration, record and payment, among others; 5. Certification under oath by the corporate secretary of the domestic corporation/custodian banks/depository account holders/broker dealers stating the legal and beneficial owners, if applicable, of all issued and outstanding shares as of record date, their corresponding subscriptions, date/s of acquisition, percentage of ownership and the allocation of dividend; 6. GIS for the year or period immediately preceding the date of declaration, if diflerent from the previously submitted GIS; 7. Original copy of the apostilled/authenticated certification issued by the NRFC, or its authorized representative, confirming that there is no substantial change in the domestic law of the country of domicile of the NRFC; __ 8._4pqq1f[_"_q ot Cgly_qUth9!1!q@{,99py olellq99U1491]!_'rsued*Qy,_qt_fi1.4 _ with, the foreign tax authority showing the amount of deemed paid tax credit actually granted by the foreign tax authority; and, 9. Proof of remittance of the dividend payments. iii. For dividends accruing to PDRs: l. Duly authenticated and executed PDR Agreement; and, 2. Proof of remittance of dividend payments to the PDR holder. The BIR reserves the right to require the presentation of the original copies for verification purposes or to request additional information or any related document which may be deemed necessary in the processing of the application. - SECTION 7. Penalties. Any violation of the provisions of this Order shall be subject to penalties provided in Section 250 and other pertinent provisions of the Tax Code, and existing revehue issuances. - SECTION 8. Repealing Clause. The provisions of any revenue issuance inconsistent with this Order are hereby revoked, repealed, or modified accordingly. SECTION 9. Effectivity. - tr CAESAR R. DULAY This Order shall take effect immediately. Commissioner of lnternal Revenue BUREAU fiF lNr{ilrq .r"l \L Kht,TK, 03S636 p IjF TffiTB#&m;i -'rt,{L k-3 bn; m# ffif ffi #[ riUJS\-#*}?., RECQftftS FdA,Y, tl vl/ l{s*Jii) nl