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Tax Notes - 11-15-2014
Tax Notes - 11-15-2014
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(A) General Definition. - Except when otherwise provided in this Title, gross income means all
income derived from whatever source, including (but not limited to) the following items:
(4) Interests;
(FF) The term 'long-term deposit or investment certificates' shall refer to certificate of time
deposit or investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments with a maturity period of not less than five
(5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued
by banks only (not by nonbank financial intermediaries and finance companies) to individuals in
denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by
the BSP.
A final withholding tax of seven and a half percent (7-1/2%) is imposed on interest income which is
actually or constructively received by a resident from a foreign currency deposit. This tax applies to
such deposits accepted and held by an OBU or FCDU in the regular course of business.
No tax is imposed on interest income received by a non-resident from foreign currency bank
deposits.
DIVIDENDS DEFINED
A. Kinds of Dividends
a. Cash Dividend
b. Stock Dividend
c. Property Dividend
d. Liquidating Dividend
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There
shall be levied, collected and paid for each taxable year upon the entire income received from all
sources within the Philippines by every nonresident alien individual not engaged in trade or business
within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or
periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent
(25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade
or business in the Philippines from the sale of shares of stock in any domestic corporation and real
property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.
FACTS:
Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized under
Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss corporation not
engaged in trade for business in the Philippines.
Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent company Glaro
dividends from which 35% withholding tax was withheld and paid to the BIR.
In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for reimbursement,
contending that it is liable only to 15% withholding tax in accordance with sec. 24 (b) (1) of the Tax
code, as amended by PD nos. 369 and 778, and not on the basis of 35% which was withheld ad paid
to and collected by the government. petitioner failed to act on the said claim for refund, hence
Wander filed a petition with Court of Tax Appeals who in turn ordered to grant a refund and/or tax
credit. CIR's petition for reconsideration was denied hence the instant petition to the Supreme Court.
ISSUE:
Whether or not Wander is entitled to the preferential rate of 15% withholding tax on dividends
declared and to remitted to its parent corporation.
HELD:
Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved in this case,
reads:
Sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is hreby further
amended to read as follows:
(b) Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation not engaged in trade or business in the
Philippines, including a foreign life insurance company not engaged in life insurance business in the Philippines, shall pay a tax
equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except
interest on a foreign loans which shall be subject to 15% tax), dividends, premiums, annuities, compensation, remuneration
for technical services or otherwise emolument, or other fixed determinable annual, periodical ot casual gains, profits and
income, and capital gains: xxx Provided, still further that on dividends received from a domestic corporation liable to tax under
this chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in sec 53 (d) of this
code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit
against tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to
20% which represents the difference between the regular tax (35%) on corporation and the tax (15%) dividends as provided
in this section: xxx."
From the above-quoted provision, the dividends received from a domestic corporation liable to tax,
the tax shall be 15% of the dividends received, subject to the condition that the country in which the
non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines equivakent to
20% which represents the difference betqween the regular tax (35%) on corpoorations and the tax
(15%) on dividends.
While it may be true that claims for refund construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax on the dividends received by Glaro from the Philippines
should be considered as a full satisfaction if the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax provided for under PD No.
369 amending section 24 (b) (1) of the Tax Code, would run counter to the very spirit and intent of
said law and definitely will adversely affect foreign corporations interest here and discourage them
for investing capital in our country.
e. Disguised Dividend
RR 02-40
SECTION 250. Dividends. Dividends, for the purpose of the law, comprise any distribution whether
in cash or other property, in the ordinary course of business, even though extraordinary in amount,
made by a domestic or resident foreign corporation, joint-stock company, partnership, joint account
(cuentas en participacion), association, or insurance company to the shareholders or members out of
its earnings or profits accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar obligations is not taxable when
received by a corporation, upon amalgamation with the other funds of the corporation, such income
loses its identity and when distributed to shareholders, is taxable to the same extent as other
dividend.
A taxable distribution made by a corporation to individual stockholders or members shall be
included is the gross income of the distributees when the cash of other property is unqualifiedly
made subject to their demand. Dividends, in cash or other property received by an individual, are
subject to tax in his hands in the same manner another income.
Dividends, whether in cash or other property, received by a domestic or resident foreign corporation
from a domestic corporation are taxable only to the extent of 25 per cent thereof in accordance with
Section 24 of the Code. Dividends received by a domestic corporation from a foreign corporation,
whether resident or nonresident, are taxable to the extent that they constitute income from sources
within the Philippines, as provided in Section 37 (a) (2) (b) ofthe Code. Dividends paid by the
domestic corporation to a nonresident foreign corporation are taxable in full. (For definition of the
different classes of corporations, see Section 84 of the Code).
SECTION 251. Dividends paid in property. Dividends paid in securities or other property (other
than its own stock), in which the earnings of a corporation have been invested, are income to the
recipients to the amount of the full market value of such property when receivable by individual
stockholders. When receivable by corporations, the amount of such dividends includible for purposes
of the tax on corporations are specified in Section 24 of the Code. (See also Section 250 of these
regulations). A dividend paid in stock of another corporation is not a stock dividend, even though the
stock distributed was acquired through the transfer by the corporation declaring the dividends of
property to the corporation the stock of which is distributed as a dividend. Where a corporation
declares a dividend payable in a stock of another corporation, setting aside the stock to be so
distributed and notifying the stockholders of its action, the income arising to the recipients of such
stock is its market value at the time the dividend becomes payable. Scrip dividends are subject to tax
in the year in which the warrants are issued.
SECTION 252.Stock dividends. A stock dividend which represents the transfer of surplus to capital
account is not subject to income tax. However a dividend in stock may constitute taxable income to
the recipients thereof notwithstanding the fact that the officers or directors of the corporation (as
defined in Section 84) choose to call such distribution as a stock dividend. The distinction between a
stock dividend which does not, and one which does, constitute income taxable to the shareholder is
the distinction between a stock dividend which works no change in the corporate entity, the same
interest in the same corporation being represented after the distribution by more shares of precisely
the same character, and a stock dividend where there either has been a change of corporate identity
or a change in the nature of the shares issued as dividends whereby the proportional interest of the
shareholders after the distribution is essentially different from his former interests. A stock dividend
constitutes income if it gives the shareholder an interest different from that which his former stock
holdings represented. A stock dividend does not constitute income if the new shares confer no
different rights or interests than did the old the new certificates plus the old representing the
same proportionate interest in the net assets of the corporation as did the old.
SECTION 253.Sale of stock received as dividends. Stock issued by a corporation, as a dividend,
does not constitute taxable income to a stockholder in such corporation, but gain may be derived or
loss sustained by the stockholder, whether individual or corporate, from the sale of such stock,
which gain or loss will be treated as arising from the sale or exchange of a capital asset. (See Section
34 of the Code.) The amount of gain derived or loss sustained from the sale of such stock, or from the
sale of the stack with respect to which it is issued, shall be determined in accordance with the
following rules:
(a) Where the stock issued as dividend is all or substantially the same character or preference as the
stock upon which the stock dividend is paid, the cost of each share (or when acquired prior to March
1, 1913, the fair market value as of such date) will be the quotient of the cost (or such fair market
value) of the old shares of stock divided by the total number of the old and new shares.(b) Where
the stock issued as a dividend is in whole or in part of a character or preference materially different
from the stock upon which the stock dividend is paid, the cost (and when acquired prior to March 1,
1913, the fair market value as of such date) of the old shares of stock shall be divided between such
old stock and the new stock, in proportion, as nearly as may be, to the respective value of each class
of stock, old and new, at the time the new shares of stock are issued, and the cost (or when acquired
prior to March 1, 1913, the fair market value as of such date) of each share of stock will be the
quotient of the cost (or such fair market value as of March 1, 1913) of the class to which such share
belongs divided by the number of shares in that class. (c) Where the stock with respect to which a
stock dividend is issued was purchased at different times and at different prices and the identity of
the lots can. not be determined, any sale of the original stock, will be charged to the earliest
purchases of such stock, and any sale of dividend stock issued with respect to such stock will be
presumed to have been made from the stock issued with respect to the earliest purchased stock, to
the amount of the dividend chargeable to such stock.(d) Where the stock with respect to which a
stock dividend is declared was purchased at different times and at different prices, and the dividend
stock issued with respect to such stock can not be identified as having been issued with respect to
any particular lot of such stock, then any sale of such dividend stock will be presumed to have been
made from the stock issued with respect to the earliest purchased stock, to the amount of the stock
dividend chargeable to such stock.