DA ITAD BIR Ruling No. 099-06

August 25, 2006 DA ITAD BIR RULING NO. 099-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-143-05 JGLaw SOL Building, 112 Amorsolo Street Legaspi Village, 1229 Makati City Philippines Attention: Ms. Mary Jane A. Delgado Mr. Ramoncito T.F. Pacis Gentlemen : This refers to your application for tax treaty relief dated November 18, 2005, on behalf of your client, United Steel Center Manila, Inc. (USCMI), requesting confirmation of your opinion that (1) dividends paid to Sumitomo Corporation (Sumitomo) are subject to the preferential tax rate of 10%; and (2) dividends paid to Mitsui & Co. Ltd. (Mitsui) are subject to the preferential tax rate of 25%, pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that Sumitomo, having its head office at 1-8-11, Harumi, Chuoku, Tokyo, 104-8610, Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty, and is subject to taxation in Japan per Residence Certificate dated September 21, 2005 issued by the District Director of the Kyobashi Tax Office, Japan; that Sumitomo has a branch office in the Philippines; that Sumitomo holds 89.99% of the total subscribed shares of USCMI; that Sumitomo's investment in USCMI came directly from Japan; that Mitsui, having its head office at address at 2-1 Ohtemachi I-Chome, Chiyoda-ku, Tokyo, Japan is a resident of Japan within the meaning of the Philippines-Japan tax treaty, and is subject to taxation in Japan per Residence Certificate dated November 4, 2005 issued by the District Director of the Kojimachi Tax Office, Japan. It is also represented that Mitsui was licensed to engage in business in the Philippines on March 17, 1967 and that to date no withdrawal or cancellation of license appears to have been filed by the corporation as certified by the Securities and Exchange Commission on October 11, 2005; that Mitsui's branch in the Philippines is licensed (1) to export, import, and engage in the domestic sale of various commodities, (2) to carry on an agency business, and (3) to manufacture all types of machines; that Mitsui holds 9.99% of the total subscribed shares of USCMI; that Sumitomo and Mitsui's investments in USCMI came directly from Japan and that such investments were made by Sumitomo and Mitsui independently of their respective Philippines branches. aHSTID It is further represented that on May 9, 2005, USCMI declared cash dividends in the amount of Nine Million Pesos (PhP9,000,000.00) to all its stockholders of record as of May 9, 2005, payable on or before June 8, 2005; that the total dividends allocated to Sumitomo is Eight Million Ninety Nine Thousand Nine Hundred Ninety Seven (8,099,997.00); that the total dividends allocated to Mitsui is Eight Hundred Ninety Nine Thousand Nine Hundred Ninety Seven (899,997.00); that 10% of the dividends received by Sumitomo amounting to Eight Hundred Nine Thousand Nine Hundred Ninety Nine Pesos and Seventy Cents (PhP809,999.70) was deducted and withheld by USCMI; that 25% of the dividends received by Mitsui amounting to Two Hundred Twenty Four Thousand Nine Hundred Ninety Nine Pesos and Twenty Five Cents (PhP224,999.25) was similarly deducted and withheld by USCMI; and that the issue/s or transaction subject of the above 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 Article 10 of the Philippines-Japan tax treaty 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 law 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. TCcDaE xxx xxx xxx" Based on the aforequoted provisions, the Philippines may tax the dividends paid by a Philippine company to a company which is a resident in 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 of the paying company 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. In the instant case, it is represented that while Mitsui and Sumitomo are licensed to engage in business in the Philippines, the investments giving rise to the subject dividend income came directly from Japan and that the same were made by Mitsui and Sumitomo independently of their respective Philippine branches. Such being the case, any income derived by Mitsui and Sumitomo independently of their respective Philippine branches shall be considered as income of Mitsui and Sumitomo 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. Consequently, the taxpayer is the foreign, 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." (italic ours) In view thereof and considering that Sumitomo holds 89.99% of USCMI's shares of stock for the period of six (6) months immediately preceding the date of payment of the dividends, per Certification issued by the Corporate Secretary of USCMI dated April 25, 2006, this Office is of the opinion and hereby holds that the dividend payments of USCMI to Sumitomo are subject to the 10% preferential tax rate pursuant to the aforequoted Article 10(2)(a) of the Philippines-Japan tax treaty (BIR Ruling No. DA-ITAD 143-05 dated November 23, 2005) Moreover, considering that as of May 9, 2005, Mitsui holds 9.99% of the shares of stock of USCMI, as shown in the Certification issued by the Corporate Secretary of USCMI dated April 25, 2006, that dividends paid to Mitsui by USCMI are subject to the 25% preferential tax rate pursuant to Article 10(2)(b) of the Philippines-Japan tax treaty. (BIR Ruling No. DA-ITAD 143-05 dated November 23, 2005) 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service