Tax Sparing Applications

A. How are dividends received by a nonresident foreign corporation (NRFC) from a domestic corporation (DC) taxed under the Tax Code?

Under Section 28(B)(5)(b) of the Tax Code of 1997, as amended, intercorporate dividends paid by a domestic corporation to an 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 30% on corporations and the reduced tax of 15% on dividends.

B. Does the NRFC need to secure a prior ruling from the BIR before the domestic corporation may apply the reduced rate of 15%?

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 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 15% waived by the Philippines or exempts from tax the dividends received.

C. How does the BIR ensure that the proper withholding tax rate is applied on the dividends received by the NRFC?

Within ninety (90) days from the remittance of the dividends or from the determination by the foreign tax authority of the deemed paid tax credit/non-imposition of tax because of the exemption, whichever is later, the NRFC or its authorized representative is required to file with the BIR, through the International Tax Affairs Division (ITAD), a request for confirmation of the applicability of the reduced dividend rate of 15%.

D. How does the BIR confirm the applicability of the reduced rate of 15%?

To streamline the process of confirming entitlement to the reduced rate, the BIR shall issue a Certificate of Entitlement to the Reduced Rate (COE) duly signed by the Assistant Commissioner for Legal Service in lieu of the usual BIR ruling.

In case of denial, a BIR ruling signed by the Commissioner or his authorized representative, which shall contain the factual and legal bases that led to the conclusion, shall be issued.

E. If a COE has already been issued to the NRFC, does it have to obtain again a confirmation on the applicability of the reduced rate to subsequent dividend payments?

Pursuant to Revenue Memorandum Circular No. 20-2022, however, taxpayers who were already issued with COEs, the tenor thereof allows the ruling to be applied to subsequent or future dividend payments, shall no longer file a request for confirmation.

F. What is the effect of denial?

Such denial may result in the imposition of a deficiency assessment for the 15% differential, plus penalties.

G. What is the remedy of the taxpayer in case of denial?

All unfavorable rulings are appealable to the Department of Finance within thirty (30) days from receipt thereof pursuant to existing rules and regulations.

H. If the NRFC is likewise entitled to a preferential tax rate under the tax treaty between the Philippines and the NRFC's country of domicile, what rate should be applied to the dividends?

The NRFC may opt to avail of the reduced dividend rate under the Tax Code, irrespective of whether a double tax convention or tax treaty exists between the Philippines and its country of residence. If the taxpayer is not entitled to the reduced rate under the Tax Code, the treaty rate shall automatically be applied provided that the NRFC is able to prove its entitlement to the benefits provided under the treaty.

I. Are dividends accruing to Philippine Depositary Receipts (PDRs) entitled to the reduced rate?

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: