DA ITAD BIR Ruling No. 068-10

June 21, 2010 DA ITAD BIR RULING NO. 068-10 Article 10, Philippines-Japan tax treaty, as amended; BIR Ruling No. ITAD-007-10 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue 1200 Makati City Attention: Mr. Romualdo V. Murcia III Partner, Tax Advisory & Compliance Gentlemen : This refers to your letter dated October 5, 2009 on behalf of your client, Pilipinas Kaneko Seeds Corporation, (hereinafter referred to as "PHILKANEKO") requesting confirmation that the cash dividends it paid to its nonresident stockholders namely: Kaneko Seeds Co., Ltd. (hereinafter referred to as "KANEKO SEEDS"), Mr. Saijuro Kaneko, Mr. Masaaki Kaneko, Mr. Noboru Nagai and Mr. Hirokatsu Hase, are subject to final withholding tax as provided under Article 10 (2) (a) and (b) 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" ), as amended by Article 3 of the Protocol Amending the Tax Convention between the Republic of the Philippines and Japan (hereinafter referred to as the "Protocol" ). cTIESa It is represented that KANEKO SEEDS is a corporation duly organized and existing under the laws of Japan under Company Registration No. 1700-01-000715, and with head office located at 1-50-12, Furuichi-machi, Maebashi City, Gunma Prefecture, Japan, as shown in its duly certified Articles of Incorporation; 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 Philippine Securities and Exchange Commission dated September 25, 2009; that Mr. Saijuro Kaneko , with address at 1-6-14, Iwagami-machi, Maebashi City, Gunma Pref. Japan; Mr. Masaaki Kaneko , with address at 1322-9 Soja, Soja-machi, Maebashi City, Gunma Pref. Japan; Mr. Noboru Nagai, with address at 403 Villa MFK8 1-5-11 Yachiyo Machi, Takasaki City, Gunma, Japan 370-0861; and Mr. Hirokatsu Hase, with address at 6-1 Iwagami-machi, 3-chome, Maebashi City, Gunma Pref. Japan, are residents of Japan for taxation purposes per Certificate of Status of Taxable Persons each issued to Messrs. Saijuro and Masaaki Kaneko and Hirokatsu Hase by the District Director of Maebashi Tax Office; and to Mr. Noboru Nagai by the District Director of Takasaki Tax Office, all certificates dated August 25, 2009; that they do not have any registered business in the Philippines per the Negative Certification issued to each of them by the Philippine Department of Trade and Industry, all dated December 7, 2009; that PHILKANEKO, on the other hand, is a corporation duly organized and existing under Philippine laws, with principal office at 606 Cattleya Land Building, 235 Salcedo Street, Legaspi Village, Makati City. Moreover, based on the Secretary's Certificate issued by PHILKANEKO dated November 20, 2009, the number and value of shares (all common and voting) and the percentage of ownership of the aforementioned nonresident stockholders in PHILKANEKO are as follows: Name of Date No. of Shares Total No. of % of Amount Stockholder Issued Subscribed Shares Ownership Kaneko Seeds 12/20/1997 1,196 Co., Ltd. 7/15/1998 13,754 29,900 29.90% 2,990,000 11/23/2000 14,950 Saijuro Kaneko 12/20/1997 4 7/15/1998 46 100 0.10% 10,000 11/23/200 * 50 Masaaki Kaneko 1/15/2002 2,500 2.50% 250,000 Noboru Nagai 1/15/2002 1,250 1.25% 125,000 Hirokatsu Hase 1/15/2002 2,500 2.50% 250,000 It is further represented that in a meeting held on January 28, 2009, the members of the Board of Directors of PHILKANEKO resolved to declare cash dividend of TWO MILLION PESOS to be distributed proportionately to the number of shares held by each stockholder on record as of February 28, 2009, as shown in a duly certified copy of the January 28, 2009 Minutes of the said meeting; that PHILKANEKO distributed the said cash dividend on February 5, 2009 per Secretary's Certificate dated November 20, 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. HScaCT In reply, please be informed that dividend income of a nonresident foreign corporation is generally taxable under Section 28 (B) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended. It provides, viz. : "SEC. 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%)." Moreover, dividend income of a nonresident alien individual not engaged in trade or business within the Philippines is generally taxable under Section 25 (B) of the NIRC of 1997. It provides, viz. : "SEC. 25. Tax on Nonresident Alien Individual. xxx xxx xxx (B) Nonresident Alien Individual Not Engaged in Trade of Business Within the Philippines. There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as . . . dividends . . ., a tax equal to twenty-five percent (25%) of such income. . . ." However, Section 32 (B) (5) of the NIRC of 1997 provides, to wit: "SEC. 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 ( i.e. , TITLE II TAX ON INCOME): ICTacD 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." In this particular case, the treaty invoked is the Philippines-Japan tax treaty which Article 10 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" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a company which is a resident thereof to 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. 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. : AEIDTc "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; (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." (Emphasis supplied) 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 of the foregoing, considering that KANEKO SEEDS holds 29.90% of the common and voting shares of PHILKANEKO since November 3, 2000 and 6 months immediately preceding the date of payment of the dividends on February 5, 2009, which is more than the required minimum shareholdings of 25 percent (10 percent under the Protocol), said cash dividend to be paid by PHILKANEKO to KANEKO SEEDS is subject to 10 percent preferential tax rate of the gross amount thereof, pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty, as amended. As to the nonresident individual stockholders namely: Messrs. Saijuro Kaneko, Masaaki Kaneko, Noboru Nagai and Hirokatsu Hase , considering that their respective shareholdings in PHILKANEKO of 0.10%, 2.50%, 1.25% and 2.50% are below the minimum required shareholdings to avail of the 10 percent preferential tax rate, their respective cash dividends from PHILKANEKO are subject to 15 percent preferential tax rate pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 dated May 20, 2010) THaDAE 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. Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal & Inspection Group