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Atty. Fulvio D. Dawilan discusses the conditions and other requirements in availing the reduced tax rate on dividends paid to non-resident foreign corporation under the tax-sparing provision of the Philippine Tax Code.

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Tax Sparing: Requirements for Availment

By: Atty. Fulvio D. Dawilan

"There are two instances where the tax sparing provision will apply, which are: (a) the country of residence of the corporate shareholder allows a credit of 15% tax deemed to have been paid in the Philippines, and (b) the country of residence of the corporate shareholder does not impose any tax on the dividends. This means that a tax relief is available in the home country of the foreign corporation, either through a grant of tax credit in the home country for the tax waived by the Philippines or by not imposing any tax on the dividends."

A number of taxpayers had recently been soliciting advice regarding their entitlement, as well as the procedures and other requirements for availing the tax-sparing provision in the Tax Code. This is triggered in part by the need to declare dividends to avoid the imposition of the improperly accumulated earnings tax (IAET). Our advice were made based on the prevailing rules at that time.

The general rule is that dividends received from the Philippines by non-resident foreign corporations are subject to income tax at the rate of 30%. This is paid in the form of final withholding tax, which is required to be remitted to the tax authority by the corporation paying the dividends. There are, however, instances where this 30% tax rate may be reduced. One is through the availment of the preferential tax rates provided in the tax treaties, if any, between the Philippines and the country of residence of the recipient of the dividends. The other instance is through the availment of the tax sparing provision in the our Tax Code.

This tax-sparing credit provision allows the reduction of the 30% tax rate to 15%, on the condition that the country in which the non-resident foreign corporation is domiciled allows a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to the difference between the regular tax rate and the 15% tax on dividends. This tax-deemed paid happens to be also at 15% (30%-15%) based on current tax rate. A decision of the Supreme Court (G.R. No. 68375, April 15, 1988) interpreted this rule to include an instance where the country of residence of the corporate stockholder does not impose any tax on the dividends derived from the Philippines.

729. BMArticle.December.TaxSparing.FDD.DEC29 IMG 3701 optimizedThus, there are two instances where the tax sparing provision will apply, which are: (a) the country of residence of the corporate shareholder allows a credit of 15% tax deemed to have been paid in the Philippines, and (b) the country of residence of the corporate shareholder does not impose any tax on the dividends. This means that a tax relief is available in the home country of the foreign corporation, either through a grant of tax credit in the home country for the tax waived by the Philippines or by not imposing any tax on the dividends. The tax treatment of the dividends in those countries should therefore be considered. A reference has to be made to the applicable laws of the country where the income recipient/shareholder has its tax residence.

These two instances had been made clear by the Court decisions and by the issuances by our tax authority. Thus, the countries where corporate shareholders could reside and avail of the reduced tax on dividends are more or less established. These will of course change with the changes in the tax laws of those countries.

What remains to be unclear are the procedures in availing the tax-sparing provision. The current tax laws and the implementing regulations prescribed no particular guidance in availing or establishing entitlement to the tax-sparing provision. An attempt was made in the past through Revenue Memorandum Order No. 27-2016, requiring an application for a ruling to avail of the 15% tax-sparing rate. However, this was suspended and never took off. Taxpayers were left with no specific guidelines to be followed in availing of the 15% tax rate.

Perhaps realizing the need to provide a system for foreign corporations intending to avail of the reduced tax on dividends and to simplify the manner of confirming the entitlement to such rate, as well as to provide uniformity in the documentary requirement, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Order No. 46-2020 (December 23, 2020). Among other features, the RMO provides that the domestic corporation paying the dividends may remit outright the dividends to the foreign corporation and apply the reduced tax rate of 15% without securing first a ruling from the BIR. The paying corporation should, however, determine whether the existing law of the home country of domicile of the payee allows a “deemed paid” tax credit in an amount equivalent to the 15% waived by the Philippines or exempts from tax the dividends received. However, within 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 foreign corporation shall file with the International Tax Affairs Division of the BIR a request for confirmation for the applicability of the reduced dividend rate of 15%. There is therefore a requirement for an after-the-fact confirmation of the reduced rate. The BIR will issue a certification in lieu of a ruling.

The application for the reduced tax rate requires certain documentary requirements both coming from the foreign corporation and the domestic-paying corporation. Aside from the usual corporate documents of the foreign corporation, the documentary requirements include: (a) 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%, and (b) 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. These requirements apply if the dividend is taxable in the country of residence. If the dividend is exempt in the country of residence, these documents will instead be required: (a) duly authenticated or apostilled copy of the law of the country of domicile, and (b) duly authenticated or apostilled copy of any document issued by the foreign tax authority confirming that the foreign corporation is exempt from tax on dividends received from a Philippine corporation.

We will reserve for the subsequent articles the discussion on the concerns already being raised related to the requirement for application and the documents required upon application. What is important at this juncture is for the taxpayers to be aware of this new rule and be ready for its compliance.

As a last note, the 30% tax rate mentioned above may soon be reduced once the Corporate Recovery and Tax Incentives for Enterprises Act is passed. The same holds true for the “tax-deemed paid” of 15%. Also, included in this proposed law is the repeal of the Improperly Accumulated Earnings Tax. Hence, the declaration of dividends may no longer be anchored on the need to avoid the IAET, but based on business considerations.

The author is the Managing Partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.

The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at This email address is being protected from spambots. You need JavaScript enabled to view it. or call 8403-2001 loc 310.