Tax notes: 15% FWT on dividends under tax sparing rule

UNDER Section 28(B)(5)(b) of the 1997 Tax Code, dividends received by a non-resident foreign corporation from a domestic corporation shall be taxed at 15 percent, subject to the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20 percent (15 percent beginning Jan. 1, 2009, as amended by RA 9337).

The Bureau of Internal Revenue (BIR) said in BIR Ruling No. 104-2012 last March 22 that exemption of dividends from taxation in the country of residence of the non-resident foreign corporation, which is the recipient of the dividend, is considered sufficient in lieu of the tax credit as a satisfaction of the condition imposed under Section 25(B)(5)(b) of the Tax Code. Hence, dividends received by a non-resident foreign corporation domiciled in a country that imposes no tax on dividends from foreign sources are subject to the 15 percent preferential withholding tax rate under said tax sparing credit provision of the Tax Code.

(Source: Punongbayan & Araullo)