DA ITAD BIR Ruling No. 090-08

November 5, 2008 DA ITAD BIR RULING NO. 090-08 Article 10, Philippines-Singapore Tax Treaty; Article 10, Philippines-Japan Tax Treaty; BIR Ruling No. DA-ITAD 26-06; BIR Ruling No. DA-ITAD 50-04 Cesar C. Cruz & Partners Law Offices 3001 Ayala Life-FGU Center 6811 Ayala Avenue Makati City, Metro Manila 1227 Philippines Attention: Cesar Cruz Gentlemen : This refers to your application for relief from double taxation dated 2 April 2007, on behalf of your client Sojitz Philippines Corporation (Sojitz Philippines), requesting confirmation of your opinion that the dividends paid by Sojitz Philippines to Sojitz Corporation (Sojitz Japan) and Sojitz Asia Pte. Ltd. (Sojitz Singapore) are subject to the preferential tax rates of 10% and 15%, pursuant to the Philippines-Japan and Philippines-Singapore tax treaties, respectively. ETaHCD It is represented that Sojitz Singapore is a nonresident foreign company and is a resident of Singapore for Year of Assessment 2008, as confirmed by the Certificate of Residence for the purpose of claiming benefit under the Singapore/Philippines DTA for Dividends, issued by Ms. Sabina II B Cheong, Assistant Commissioner Corporate Tax Division for Comptroller of Income Tax dated 14 August 2007; that Sojitz Singapore's office address is at 77 Robinson Road, #32-00 Robinson Road, Singapore 068896; that Sojitz Singapore is not registered either as corporation or as a partnership in the Philippines per Certification issued by the Securities and Exchange Commission (SEC) dated 9 March 2007. It is further represented that Sojitz Japan is a registered taxpayer of Japan with office address at 1-20, Akasaka 6-chome, Minato-ku, Tokyo, Japan as certified by the District Director of Azabu Tax Office, Japan; that it has a branch in the Philippines under the name of Sojitz Corporation, Philippine Branch, with SEC Registration No. F-496; that Sojitz Corporation, Philippine Branch is not privy and does not have any participation whatsoever in the holdings of Sojitz Japan of shares of stock in Sojitz Philippines; that Sojitz Philippines is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 24F Pacific Star Building, Makati Avenue corner Buendia Avenue, Makati, Philippines. THEDCA It is also represented that Sojitz Singapore holds Forty-Seven Thousand Nine Hundred Ninety-Eight (47,998) subscribed and outstanding voting shares amounting to Forty-Seven Million Nine Hundred Ninety-Eight Thousand Pesos (PhP47,998,000.00), representing 60% of the outstanding voting shares of Sojitz Philippines, and such shareholdings have existed during the part of the taxable year immediately preceding the date of payment of dividends declared on 23 March 2007 by Sojitz Philippines and during the whole of Sojitz Philippines' prior taxable year, as stated in the Corporate Secretary's Certificate dated 30 March 2007; that Sojitz Japan holds Thirty-One Thousand Nine Hundred Ninety-Seven (31,997) subscribed and outstanding voting shares amounting to Thirty-One Million Nine Hundred Ninety-Seven Thousand Pesos (PhP31,997,000.00), representing 40% of the outstanding voting shares of Sojitz Philippines for a period of at least six (6) months immediately preceding the date of payment of subject dividends and prior thereto, as stated in the Corporate Secretary's Certificate dated 30 March 2007; that on 23 March 2007, Sojitz Philippines' Board of Directors declared from the retained earnings of Sojitz Philippines a dividend of Three Hundred Seventy-Five Pesos (PhP375.00) per share on the common stock of Sojitz Philippines, payable not later than 31 December 2007 to stockholders of record of the said stock in the close of business of 31 December 2006; and that the issue/s or transaction subject of the above request for ruling is not under investigation, neither is it the subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. TCacIE 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 non-resident foreign corporation such as Sojitz Singapore and Sojitz 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%). DTaSIc xxx xxx xxx 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. xxx xxx xxx" In accordance with the foregoing, the Philippines-Singapore tax treaty, particularly its Article 10, may apply to the dividend payments received by Sojitz Singapore. Article 10 provides: "ARTICLE 10 Dividends (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 State. (2) However, such dividends may be taxed in the Contracting State of which the company paying the dividends is a resident, and according to the law of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: (a) 15 per cent of the gross amount of the dividends if the recipient is a company (including partnership) and during the part of the paying company's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 15 per cent of the outstanding shares of the voting stock of the paying company was owned by the recipient company; and (b) in all other cases, 25 per cent of the gross amount of the dividends. xxx xxx xxx (4) The term 'dividends' as used in this Article means income from shares, 'jouissance' shares or jouissance rights, mining shares, founder's shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. DCHIAS xxx xxx xxx" Based on the aforequoted provisions, the 15% preferential tax rate on dividends applies whenever the beneficial owner/recipient of the dividends owns at least 15% percent of the outstanding voting shares of the voting stock of paying company, which fifteen percent (15%) shareholdings should have existed during the part of the paying company's taxable year immediately preceding the date of payment of the dividends and during the whole of its prior taxable year, if any. Since Sojitz Singapore held 60% percent of the total outstanding voting shares of Sojitz Philippines from 31 December 2006 as evidenced by a stock certificate issued in favor of Sojitz Singapore, dividends received by Sojitz Singapore shall be subject to the preferential tax rate of 15%, pursuant to Article 10 (2) (a) of the Philippines-Singapore tax treaty. (BIR Ruling No. DA-ITAD-26-06 dated March 16, 2006) Whereas, the Philippines-Japan tax treaty, particularly its Article 10, may apply to the dividend payments received by Sojitz 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; (b) 25 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. aSADIC xxx xxx xxx" Although Sojitz Japan has a branch operating in the Philippines, the situation of a parent/head office directly entering into a business transaction in the Philippines without the participation of its branch is regarded as separate and distinct from the activities of the branch for income tax purposes. Thus, in the case of Marubeni vs. CIR, (G.R. No. 76573 dated September 14, 1989) the Supreme Court 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's, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollary, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." DcaCSE Accordingly, since Sojitz Corporation, Philippine Branch, is not privy and does not have any participation whatsoever in the holdings of Sojitz Japan of shares of stock in Sojitz Philippines, the cash dividends received by Sojitz Japan should not be attributed to its branch office. Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident of Japan at a rate not exceeding 10% of the gross amount of dividends if the latter holds at least 25% either of the voting shares or of the total shares during the period of six (6) months immediately preceding the date of payment of the dividends. In all other cases, the 25% preferential tax rate on gross dividends shall apply. Considering that as of 31 December 2006, Sojitz Japan holds 40% of the outstanding voting shares of Sojitz Philippines, as shown in the Certification issued by the Corporate Secretary of Sojitz Philippines dated 23 March 2007, the dividends paid to Sojitz Japan by Sojitz Philippines are subject to 10% preferential tax rate pursuant to Article 10 (2) (a) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 50-04 dated May 7, 2004) 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. HDIaST Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner