DA ITAD BIR Ruling No. 054-10

June 2, 2010 DA ITAD BIR RULING NO. 054-10 Article 10, Philippines-Japan tax treaty; BIR Ruling No. 87-83; BIR Ruling No. ITAD-20-99; BIR Ruling No. ITAD-8-99; BIR Ruling No. ITAD-47-99; BIR Ruling No. ITAD-41-99 Romulo Mabanta Buenaventura Sayoc & De Los Angeles Attorneys at Law 30th Floor, Citibank Tower 8741 Paseo de Roxas Makati City Attention: Atty. Priscilla B. Valer Gentlemen/Ladies : This refers to your letter dated November 04, 2009, on behalf of IMASEN ELECTRIC INDUSTRIAL CO. LTD. (hereinafter referred to as "Imasen-Japan") , requesting confirmation that the dividends paid by IMASEN PHILIPPINE MANUFACTURING CORPORATION (hereinafter referred to as "Imasen-Phils.") to Imasen Japan are subject to withholding tax at the rate of 10 percent, pursuant to Article 10 of the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as the "Philippines-Japan tax treaty") . It is represented that Imasen-Japan is a corporation duly organized and incorporated under the laws of Japan on February 1, 1939 under Corporate Registration No.: 1820-01-000050, with principal place of business at Aza Kakihata, Inuyama, Aichi, Japan, as evidenced by a duly consularized notarized Certificate of Entire Record of Corporate Registration which was affirmed and certified by the Inuyama District Office, Nagoya Legal Affairs Bureau on August 31, 2009; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-registration of Company issued by the Philippine Securities and Exchange Commission dated October 26, 2009; that Imasen-Phils., on the other hand, is a corporation duly organized and existing under the laws of the Philippines with principal office address at 101 East Main Avenue, Laguna Technopark, Bian, Laguna; that as of January 1, 2009, of the total 162,500 shares issued and subscribed in Imasen-Phils., Imasen-Japan has 146,247 shares at P1,000 par value per share constituting 89.99% thereof as of January 1, 2009, with an equivalent amount of P146,247,000.00, per Secretary's Certificate issued by Imasen-Phils., dated February 11, 2009; and that Imasen Japan holds the total 146,246 shares since April 17, 2008 per Secretary's Certificate issued by Imasen Phils., dated March 30, 2010. It is further represented that at the special meeting of the Board of Directors of Imasen-Phils. on March 16, 2009, a resolution was unanimously adopted to declare a cash dividend in the amount of SEVENTY-ONE MILLION FIVE HUNDRED THOUSAND YEN (71,500,000.00) or FOUR HUNDRED FORTY * (440) per share to stockholders of record as of December 31, 2008 payable on or before March 30, 2009, per Secretary's Certificate issued by Imasen-Phils. dated March 27, 2009; and that the issue subject of the above request is not under any investigation or on-going audit, administrative protest, claim for refund or issuance of tax credit certificate, collection proceedings, or a judicial appeal. aTcSID In reply, please be informed that Article 10 of the Philippines-Japan tax treaty provides, viz.: "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" In relation thereto, there is the Protocol amending the Philippines-Japan tax treaty (Protocol) which took effect on January 1, 2009 which Article III provides, viz.: "ARTICLE III Paragraph (2) of Article 10 of the Convention shall be deleted and replaced by the following: "(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: TIADCc (a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 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) 15 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." Based on the foregoing, 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 of the company paying the dividends 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. Under the Protocol, the minimum shareholding requirement for the application of the 10 percent preferential tax rate on dividends was reduced from 25 percent to 10 percent; and the maximum preferential tax rate of 25 percent on dividends in all other cases was reduced to 15 percent. In view thereof, this Office is of the opinion and so holds that since the 146,247 shares held by Imasen-Japan constitute 89.99% of the total subscribed capital stock of the Imasen-Phils. which is more than the minimum 25 percent shareholding requirement (10 percent, under the amended Philippines-Japan tax treaty), and that Imasen-Japan has been holding the said shares since April 17, 2008 (a period of more than 6 months immediately preceding the date of payment of the dividend on March 30, 2009), the subject dividend to be paid by Imasen-Phils. to Imasen-Japan is subject to 10 percent preferential tax rate, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-20-99 dated 18 August 1999; BIR Ruling No. ITAD-8-99 dated 20 July 1999; BIR Ruling No. 87-83 dated 17 May 1983; BIR Ruling No. ITAD-47-99 dated 9 December 1999; BIR Ruling No. ITAD-41-99 dated 3 November 1999) This ruling is issued on the basis of the facts as represented. However, if upon investigation it shall be disclosed that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. AaITCS Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner