DA ITAD BIR Ruling No. 055-07

April 25, 2007 DA ITAD BIR RULING NO. 055-07 Article 10, Philippines-Japan Tax Treaty; BIR Ruling No. DA-ITAD 34-05 Hayakawa Electronics (Phils.) Corp. Main Avenue corner First Street Cavite Economic Zone Rosario, Cavite, Philippines Attention: Mr. Mario Ponce de Leon Treasurer Gentlemen : This refers to your letter dated January 16, 2006 requesting confirmation that the dividend payments of Hayakawa Electronics (Phils.) Corp. (HEPC) to Hayakawa Electric Wire (Co., Ltd. (HEWC) are subject to a 10% preferential tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that HEWC is a nonresident foreign corporation duly organized and existing under the laws of Japan with business address at 422 Nishi-Nobusue, Himeji City, Hyogo, Japan; that it is not registered either as a corporation or as a partnership in the Philippines per certification issued by the Securities and Exchange Commission dated September 12, 2005; that HEPC is a domestic corporation with office address at Main Avenue corner First Street, Cavite Economic Zone, Rosario, Cavite, Philippines; that since December 31, 2004, HEWC has Eight Hundred Ninety Two Thousand Nine Hundred (892,900) shares with a par value of PhP100.00 per share and an aggregate value of Eighty Nine Million Two Hundred Ninety Thousand Pesos (PhP89,290,000.00), representing 99.99% of the outstanding shares of HEPC as shown in the certification issued by the Corporate Secretary of HEPC dated July 28, 2006; that on July 4, 2005 the Board of Directors of HEPC declared cash dividends in the amount of Fifty Six Million Six Hundred Seventy Two Thousand Six Hundred Eighty Pesos and Thirty Five Centavos (PhP56,672,680.35) representing sixty three and forty seven tenths percent (63.47%) of paid-up capital of HEPC to be declared out of the unrestricted retained earnings of HEPC to stockholders as of June 30, 2005; and that the issue/s 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 Article 10 of the Philippines-Japan tax treaty 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 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 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. Such being the case, and considering that HEWC held 99.99% percent of the total shares of stock of HEPC six months immediately preceding the payment of dividends, this Office is of the opinion and so holds that the dividend payments by HEPC to HEWC 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. DA-ITAD 034-05 dated April 18, 2005) aESIHT 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service