Dividends to branch

ON March 28, 2012, the Bureau of Internal Revenue (BIR) issued BIR Ruling No. ITAD 140-12 which involves the distribution of dividends from a Philippine domestic corporation to a stockholder who is a Japanese corporation with a branch operating in the Philippines.

The BIR ruled that as to dividends not effectively connected with the Philippine branch, the dividends paid by the Philippine entity to the Japanese corporation are subject to the preferential tax rate of 10 percent of the gross amount thereof, pursuant to paragraph 2(a), Article 10 of the Philippines-Japan tax treaty.

The author agrees with the BIR Ruling on this particular matter.

However, the BIR also ruled that dividends effectively connected with the Philippine branch paid by the Philippine entity should be included in the taxable income of the Japanese corporation’s branch office and are subject to the income tax at the rate of 30 percent allegedly based on Section 28(A) of the Tax Code.

The author respectfully disagrees with the ruling with regards to the treatment of the tax on the dividends effectively connected with the Philippine branch paid by the Philippine entity as this might already be in contravention already with the Tax Code.

A branch office is considered as a resident foreign corporation. On the other hand, it is important to note that it was a Philippine entity, more specifically a Philippine domestic corporation, that was the issuer of the dividends.

Accordingly, under Section 28(A)(7)(d) of the Tax Code, it has clearly been stated that the dividends received by a resident foreign corporation such as a branch from a domestic corporation shall not be subject to tax. The tax of 30 percent on the dividends effectively connected with the Philippine branch paid by the Philippine entity should not have been imposed.

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