DA ITAD BIR Ruling No. 052-10

May 25, 2010 DA ITAD BIR RULING NO. 052-10 Article 10, Philippines-Japan tax treaty Section 28 (B) (1) in relation to Section 32 (B) (5) of the Tax Code of 1997, as amended; BIR Ruling No. 087-83; BIR Ruling No. ITAD-008-99; BIR Ruling No. ITAD-020-99; BIR Ruling No. ITAD-041-99; BIR Ruling No. ITAD-047-99 Nagase Philippines International Services Corporation 18-B Trafalgar Plaza, H.V. Dela Costa Street Salcedo Village, Makati City, Philippines Attention: Shoji Fujii President Gentlemen : This refers to your letter dated December 22, 2007 requesting confirmation that the dividend payments of Nagase Philippines International Services Corporation (Nagase Philippines) to Nagase & Co. (Nagase Japan) are subject to a 10 percent preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. It is represented that Nagase Japan is a nonresident foreign corporation with address at 1-17, Shinmachi 1-chome, Nishi-ku, Osaka, 550-8668, Japan per Residence Certificate issued by Nishi Tax Office dated June 15, 2007; that it was licensed to establish its regional or area headquarters in the Philippines on July 31, 1981; that said license was cancelled per Certificate of Cancellation of License of a Multinational Company to Establish a Regional or Area Headquarters approved on February 15, 1984, per certification issued by the Securities and Exchange Commission dated October 30, 2007; that Nagase Philippines is a corporation organized and existing under the laws of the Philippines with office address at Building 3, 123-125 Technology Avenue, Phase 4, LTI Bian, Laguna, Philippines. It is further represented that as of December 31, 2006, Nagase Japan has Three Hundred Ninety-Nine Thousand Nine Hundred Ninety Five (399,995) shares with a par value of PhP100.00 per share and an aggregate value of Thirty-Nine Million Nine Hundred Ninety-Nine Thousand Five Hundred Pesos (PhP39,999,500.00), representing 99.99% of the total shares of Nagase Philippines as shown in the certification issued by the Corporate Secretary of Nagase Philippines dated October 22, 2007; that Nagase Philippines declared cash dividends amounting to Thirty Thousand US Dollars (US$30,000.00), as per Board Resolution No. 2007-002 dated August 17, 2007, out of the unrestricted retained earnings of Nagase Philippines as of December 31, 2006 to be paid not later than September 15, 2007 to stockholders of record as of July 31, 2007; and that the issue or transaction subject of the above request for ruling is not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings, or a judicial appeal of the taxpayer/s involved. In reply, please be informed that Section 28 (B) (1) of the National Internal Revenue Code (Tax Code) of 1997, as amended, applies in general. It provides: DcaECT "Section 28. Rates of Income Tax on Foreign Corporations. xxx xxx xxx (B) Tax on Nonresident Foreign Corporation. (1) In General. Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as . . ., dividends, . . .: Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%). xxx xxx xxx" However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "Section 32. Gross Income. xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (5) Income Exempt under Treaty. Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. xxx xxx xxx" In this particular case, the treaty involved is the Philippines-Japan tax treaty which, in its Article 10, provides as follows: "Article 10 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25 per cent either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of six months immediately preceding the date of payment of the dividends; b) 25 per cent of the gross amount of the dividends in all other cases. The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. Notwithstanding the provisions of paragraph (2), the amount of tax imposed by the Philippines on the dividends paid by a company, being a resident of the Philippines, registered with the Board of Investments and engaged in preferred pioneer areas of investment under the investment incentives laws of the Philippines to a resident of Japan, who is the beneficial owner of the dividends, shall not exceed 10 per cent of the gross amount of the dividends. 4. The term 'dividends' as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to a company which is a resident of Japan at a rate not exceeding 10 percent if the last-mentioned company holds directly at least 25 percent of the voting shares or of the total shares of the first-mentioned company for a period of six (6) months immediately preceding the date of payment of the dividends, or if the dividends are paid to by a company who is registered with the Philippine Board of Investments and engaged in preferred pioneer areas of investment. aEcTDI Such being the case, and considering that Nagase Japan held 99.99% percent of the total shares of stock of Nagase Philippines during the period of six months immediately preceding the dates of declaration and payment, this Office is of the opinion and so holds that the dividend payments by Nagase Philippines to Nagase Japan shall be subject to the preferential tax rate of 10 percent, based on the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. 087-83 dated May 17, 1983; BIR Ruling No. ITAD-008-99 dated July 20, 1999; BIR Ruling No. ITAD-020-99 dated August 18, 1999; BIR Ruling No. ITAD-041-99 dated November 3, 1999; and BIR Ruling No. ITAD-047-99 dated December 9, 1999.) This ruling is issued on the basis of the facts as represented. However, if upon investigation, it shall be disclosed that the actual facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner