DA ITAD BIR Ruling No. 069-10

June 25, 2010 DA ITAD BIR RULING NO. 069-10 Article 10 (2) (a) of the Philippines-Japan tax treaty; BIR Ruling No. ITAD-007-10 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Wilfredo U. Villanueva Principal, Tax Services Gentlemen : This refers to your letter dated January 26, 2009, on behalf of your client, Mitsubishi Corporation Tokyo Head Office (Mitsubishi-Japan), requesting confirmation of your opinion that the dividends to be paid and remitted by Ayala Corporation (Ayala) to Mitsubishi-Japan is subject to the preferential final withholding tax rate of ten percent (10%) pursuant to Article 10 (2) (a) of the amended Philippines-Japan tax treaty. CSIcTa It is represented that Mitsubishi-Japan is a corporation organized and existing under the laws of Japan with principal address at 3-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, Japan based on a Residence Certificate issued on January 16, 2009 by Mr. Norio Komatsu, District Director of Kjimachi Tax Office; that it was licensed in the Philippines to engage in the business of purchasing, selling and trading coal, petroleum, gas, and other fuels and products processed therefrom, iron, non-ferrous metals and products processed therefrom, as well as ores and minerals, machinery, mechanical devices, appliances and instruments (including meters and medical equipment), vehicles, ships and aircraft as well as parts and accessories therefore, among other lines of business, per Certificate of Corporate Filing/Information issued by the Securities and Exchange Commission dated October 9, 2007; that on the other hand, Ayala is a corporation organized and existing under the laws of the Philippines with principal address at 34F Tower One, Ayala Triangle, Ayala Avenue, Makati City. It is further represented that although Mitsubishi-Japan has a branch in the Philippines, the investment or shares in Ayala was directly acquired by Mitsubishi-Japan, without the participation of its Philippine branch; that during the regular board meeting of the Board of Directors of Ayala on December 11, 2008, the Board of Directors passed and approved a Resolution declaring regular cash dividends from the unappropriated retained earnings of Ayala as of December 31, 2007 in the amount of Two Pesos (PhP2.00) per share to all outstanding common shares of Ayala ( i.e. , stockholders owning Ayala common shares) as of record date of January 9, 2009 and payable on February 3, 2009; that for a period of six (6) months immediately preceding the date of payment of said dividends, Mitsubishi-Japan is the registered and beneficial owner of 52,564,618 1 common shares in the capital stock of Ayala, which have a par value of Fifty Pesos (PhP50.00) per share and a total par value of Two Billion Six Hundred Twenty-Eight Million Two Hundred Thirty Thousand Nine Hundred Pesos (PhP2,628,230,900.00), representing 10.58% of the outstanding and voting shares of Ayala; and that the issue or transaction subject of this request for ruling is not under investigation, on-going audit, administrative protest, claims for refund or issuance of a tax credit certificate, collection proceedings, or judicial appeal per certification issued by Ayala dated January 16, 2009. 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 which 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 interest, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)." However, Section 32 (B) (5) of the Tax Code of 1997, as amended provides: "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. CHTcSE xxx xxx xxx" Thus, the provisions of Article 10 of the Philippines-Japan tax treaty, as amended by Article III of its Protocol, which you invoke, may apply to the instant case. It 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 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. 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. xxx xxx xxx." Based on the aforequoted provisions, the Philippines may tax the dividends paid by resident thereof to a company which is a resident of Japan at a rate not exceeding 10% if the latter company holds directly at least 10% of either of the voting shares of the company paying the dividends or of the total shares issued by that company during the period of 6 months immediately preceding the date of payment of the dividends; otherwise, said dividends may be taxed at a rate not exceeding fifteen percent (15%) of the gross amount in all other cases. Moreover, in the case of MARUBENI CORPORATION (Formerly Marubeni-Iida, Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE AND COURT OF TAX APPEALS, respondents. (G.R. No. 76573 dated September 14, 1989), it was held that: "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. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." HAEDCT Accordingly, the profits of a corporation which is a resident of Japan is taxable only in Japan, unless the Japanese corporation carries on business in the Philippines through a permanent establishment situated therein. In the instant case, though the Japanese corporation has a Philippine branch, it has been represented that the Philippine branch has no participation whatsoever in the investment that was made by the Japanese corporation. Hence, income derived through the payment of dividends by Ayala to Mitsubishi-Japan shall be considered as income of Mitsubishi-Japan as ruled in the aforesaid case of Marubeni vs. CIR (G.R. No. 76573). In view thereof and considering that Mitsubishi-Japan holds directly 10.58% of shareholdings in Ayala or more than the required minimum shareholdings of 10%, for a period of 6 months immediately preceding the date of payment, said dividends paid by Ayala to Mitsubishi-Japan are subject to 10% preferential tax rate, pursuant to Article 10 (2) (a) of Philippines-Japan tax treaty, as amended. (BIR Ruling No. ITAD-007-10 dated May 20, 2010) This ruling is issued on the basis of the foregoing 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, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner Legal & Inspection Group Footnotes 1. This includes one (1) common share held in trust by Mr. Toshifumi Inami.