Under the National Internal Revenue Code (“NIRC”), Domestic Corporations are taxable on its worldwide net taxable income. The applicable rate is Thirty percent (30%) including dividends received from a Foreign Entity not doing business in the Philippines. Thus, if the issuing entity is a Non-Resident Foreign Corporation (“NRFC”), the same shall be included in the Domestic Corporation’s gross income and is subject to Thirty Percent (30%) tax rate. The said rate can no longer be reduced if there is no existing tax treaty between Philippines and the foreign country. Consequently, it is the duty of all Domestic Corporations receiving dividends or any other form of income from a NRFC to disclose the same and include it in their Gross Income.
Simply put, if a Domestic Corporation will invest funds as stockholder / corporator to a NRFC, any distribution of profits from the latter shall be deemed as corporate dividends and therefore shall be subject to tax at the rate of Thirty Percent (30%) based on our NIRC. Please note that the exemptions under the rule on “Intra-Corporate Dividends” only applies to dividends received from a Domestic Corporation by another Domestic Corporation or Foreign Corporation. It does not apply if the issuer of dividends is a Foreign Corporation. Neither the Final Withholding Tax Rate of Ten Percent (10%) would apply since the source of income is outside our jurisdiction. Our government has no power to require NRFC to withhold taxes and remit the same in our place. Consequently, for recording purposes, an increase in the cash in bank of the Domestic Corporation by way of distribution of dividends shall have a corresponding increase of income in its books for tax audit purposes.
Please note further that the above discussion applies only if Domestic Corporation will be listed in their General Information Sheet (“GIS”) as a stockholder or incorporator considering that dividends are given only to stockholders. Meaning, once the funds are invested to Foreign Entity, it must be ensured that the same shall be reflected as investments of the Domestic Corporation acting as a stockholder to apply this option.