DA ITAD BIR Ruling No. 068-08

October 24, 2008 DA ITAD BIR RULING NO. 068-08 Article 10 (2) (a), Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-50-04 Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City, Philippines Attention: Joel L. Tan-Torres Principal, Tax Services Gentlemen : This refers to your application for tax treaty relief dated 21 April 2008 filed on behalf of your client, Mitsubishi Heavy Industries Philippines, Inc. (MHIP), requesting confirmation of your opinion that the dividend payments to be made by MHIP to Mitsubishi Heavy Industries, Ltd. (MHI Japan) are subject to the 10% preferential tax rate, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. IDETCA It is represented that MHI Japan is a nonresident foreign corporation organized and existing under the laws of Japan with office address at 16-5 Konan 2-chome, Minato-ku, Tokyo 108-8215, Japan; that it is a tax resident of Japan for the Avoidance of Double Taxation between the Philippines and Japan, as certified by the Shiba Tax Office of Japan; that MHI Japan has a branch office in the Philippines under SEC Registration No. A2004-17 per Certification dated 21 February 2008 issued by the Securities and Exchange Commission; that MHIP is a corporation organized and existing under laws of the Philippines, with business address at 24th Floor Yuchengco Tower, RCBC Plaza, Ayala Avenue corner Senator Gil J. Puyat, Makati City, Philippines. It is also represented that MHI Japan holds Nine Hundred Thirty-Five Thousand Nine Hundred Ninety-Five (935,995) shares of stock of MHIP, with a par value of One Hundred Pesos (PhP100) per share or a total of Ninety-Three Million Five Hundred Ninety-Nine Thousand Five Hundred Pesos (PhP93,599,500.00), representing 99.99% of the total issued and outstanding capital stock of MHIP from the date of MHIP's incorporation in 1997 up to the present, per certification issued by the Corporate Secretary of MHIP dated 20 February 2008; that at the meeting of the Board of Directors of MHIP held on 8 January 2008, it was resolved that a cash dividend in the amount of One Hundred Twenty-Nine Million Pesos (PhP129,000,000.00) be declared out of MHIP's retained earnings as of 31 December 2007 be distributed to all stockholders of record as of December 31, 2007; and that the transaction subject of the instant 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 to dividends received by a nonresident foreign corporation such as MHI Japan. It provides: "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: cIHSTC "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 accordance with the foregoing, the Philippines-Japan tax treaty, particularly its Article 10, may apply to the dividend payments received by MHI Japan. Article 10 provides: "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; ADCIca 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. xxx xxx xxx 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. AaHDSI 5. The provisions of paragraphs (1)(2) and (3) shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a Japanese company at a rate not exceeding 10% based on the gross amount of dividends if the latter holds directly at least 25% either of the voting shares or of the total shares of the former for a period of six (6) months immediately preceding the date of payment of the dividends, and/or if the Philippine company is a BOI-registered enterprise engaged in preferred pioneer areas of investment, or at a rate of 25% of the gross amount of dividends in all other cases. However, the said preferential rates shall not apply if the beneficial owner of the dividends carries on business in the Philippines through a permanent establishment and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment of fixed base. In the instant case, while MHI Japan maintains a Philippine branch in the Philippines, it is represented that said branch is not privy and does not have any participation whatsoever in the holding of MHI Japan's shares of stocks in MHIP. Such being the case, any income derived by MHI Japan independently of its branch shall be considered income of MHI Japan alone, applying the rule enunciated in the case of Marubeni vs. CIR (G.R. No. 76573 dated September 14, 1989), pertinently quoted hereunder: "The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on the premise that the business of the foreign corporation is conducted through its branch office, following the principal-agent relationship theory. It is understood that the branch becomes its agent here. So that when the foreign corporation transacts business in the Philippines independently of its branch, the principal agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Corollary, if the business transaction is connected through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (emphasis supplied) In view of the foregoing, since MHI Japan, being the recipient of the dividends, owns 99.99% of the total issued and outstanding shares of stock of MHIP during the six months immediately preceding the date of the dividends, and that the holding of the subject shares are not effectively connected with MHI Japan' s branch office as the latter is not privy to the transactions between MHI Japan and MHIP, this Office is of the opinion and so holds that the cash dividends to be remitted by MHIP to MHI Japan are subject to the preferential rate of 10% withholding tax pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD-50-04 dated May 7, 2004) TcDAHS This ruling is issued based on 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