DA ITAD BIR Ruling No. 066-10

June 21, 2010 DA ITAD BIR RULING NO. 066-10 Article 10, Philippines-Japan tax treaty; BIR Ruling No. ITAD-20-99; BIR Ruling No. ITAD-8-99; BIR Ruling No. 87-83; BIR Ruling No. ITAD-47-99; BIR Ruling No. ITAD-41-99 Diez Corporation 100 South Science Ave. Laguna Technopark Don Jose, Sta. Rosa, Laguna Attention: Mr. Masahiko Enoki Vice President Gentlemen : This refers to your letter dated 16 June 2009, on behalf of FUJITSU TEN LIMITED (hereinafter referred to as "FTL"), requesting confirmation that the dividends paid to it by DIEZ CORPORATION (hereinafter referred to as "DIEZ") are subject to a preferential tax rate of ten percent (10%), pursuant to the Protocol amending the Philippines-Japan tax treaty. 1 ITHADC It is represented that FTL is a corporation organized and existing under the laws of Japan and is a resident thereof for tax purposes, with principal place of business at 2-28, Gosho-dori, 1-chome, Hyogo-ku, Kobe, Hyogo, Japan as evidenced by a Certificate of Residence issued by the District Director of Hyogo Tax Office dated 26 May 2009; that it is not registered either as a corporation or as a partnership in the Philippines per Certification of Non-registration of Corporation/Partnership issued by the Philippines' Securities and Exchange Commission (SEC) dated 16 February 2009; that DIEZ, on the other hand, is a corporation duly organized and existing under the laws of the Philippines with address at 100 South Science Avenue, Laguna Technopark, Sta. Rosa, Laguna; that per records, its authorized capital stock is 120,000,000 divided into 1,200,000 shares, all common, with a par value of P100.00 per share; that of the aforementioned authorized capital stock of DIEZ, the amount of P30,000,000.00 representing 300,000 shares, with a par value of P100.00 per share, inclusive of the qualifying shares of the five (5) members of its Board of Directors, has been subscribed and that of the said subscription, the amount of P13,000,000.00, representing 130,000 shares with a par value of P100.00 per share, has been paid up; and that of the above subscribed and paid-up capital stock of the DIEZ, forty percent (40%) thereof, or the amount of P12,000,000.00, representing 120,000 shares with a par value of P100.00 per share, belongs to FTL, inclusive of the two (2) qualifying shares of its nominees in the Board of Directors of DIEZ. It is further represented that at a Special Meeting of the members of the Board of Directors of DIEZ held on 15 January 2009, a resolution was approved declaring cash dividends amounting to Four Hundred Fifty Thousand Pesos (P450,000.00) out of the unappropriated retained earnings of Twelve Million Two Hundred Fifty-One Thousand Nine Hundred Six & 24/100 Pesos (P12,251,906.24), of DIEZ as of 31 December 2008 based on its unaudited financial statements as of said date, to be paid on or before 31 June 2009 to all the stockholders of record as of 31 December 2008, at the rate of One & 50/100 Pesos (P1.50), Philippine Currency, per share; 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. 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; cCTAIE (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 01 January 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: (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; cEaCAH (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 months immediately preceding the date of payment of the dividends. Under the Protocol, the minimum shareholding requirement for the application of the 10% preferential tax rate on dividends is reduced from 25% to 10%; and the maximum preferential tax rate of 25% on dividends in all other cases was reduced to 15%. In view thereof, considering that as of 31 December 2008, FTL directly holds P120,000,000.00 common shares, which is 40% of the total paid up capital stock of the DIEZ amounting to P30,000,000.00, and that FTL holds the said shares six months immediately preceding the date of payment of dividends on 30 June 2009, said dividends to be paid by DIEZ to FTL are subject to ten percent (10%) 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. acCITS Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal and Inspection Group Footnotes 1. Formally known as 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.