DA ITAD BIR Ruling No. 113-06

September 27, 2006 DA ITAD BIR RULING NO. 113-06 Article 10, Philippines-Singapore Tax Treaty; Article 10, Philippines-Japan Tax Treaty; BIR Ruling No. DA-ITAD-26-06; BIR Ruling No. 165-94 Fujitsu Ten Corporation of the Philippines 100 South Science Ave. Laguna Technopark Don Jose, Sta. Rosa, Laguna Attention: Ms. Mary Jane H. Go Accounting Dept. Manager Gentlemen : This refers to your application for relief from double taxation dated November 7, 2005, requesting confirmation of your opinion that the dividends paid by Fujitsu Ten Corporation of the Philippines (FTCP) are subject to the preferential tax rates of 10% and 15%, pursuant to the Philippines-Japan and Philippines-Singapore tax treaties, respectively. It is represented that Fujitsu Ten (Singapore) Pte., Ltd. (FTSL) is a nonresident foreign company duly organized and existing under the laws of Singapore with office address at 20 Science Park, Road #02-01/03, Teletech Park, Singapore Science Park II, Singapore 117674; that it is engaged in trading of raw materials; that FTSL is not registered either as corporation or as a partnership in the Philippines per Certification issued by the Securities & Exchange Commission dated August 22, 2005; that Fujitsu Ten Limited. (FTL) is a nonresident foreign company duly organized and existing under the laws of Japan with office address at 2-28 Gosho-Dori, 1-Chome, Hyogo-ku, Kobe, Japan; that FTL is not registered either as corporation or as a partnership in the Philippines per Certification issued by the Securities & Exchange Commission dated August 19, 2005; that FTCP is a corporation duly organized and existing under and by virtue of the laws of the Philippines with office address at 100 South Science Ave., Laguna Technopark, Don Jose, Sta. Rosa, Laguna, Philippines; that it is engaged in the manufacture of car audio and car electronic products and is a Philippine Economic Zone Authority (PEZA) registered export enterprise under Registration Certificate No. 01-063 dated October 29, 2001 issued by the PEZA. It is also represented that FTCP has an authorized capital stock of Two Hundred Million Pesos (PhP200,000,000.00) (divided into 2,000,000 common shares with a par value of PhP100 per share); that out of such authorized capital stock, 1,300,000.00 shares have been subscribed by FTL, whose stockholdings of 975,000 shares, with a total value of Ninety Seven Million Five Hundred Thousand Pesos (P97,500,000.00), constitute seventy five percent (75%) of the total subscribed and paid up capital stock of FTCP amounting to One Hundred Thirty Million Pesos (PhP130,000,000.00), and by FTSL, whose stockholdings of 325,000 shares with a total value of Thirty Two Million Five Hundred Thousand Pesos (PhP32,500,000.00) constitute twenty five percent (25%) of the total subscribed and paid up capital stock of FTCP; that such stockholding of 325,000 shares is evidenced by a stock certificate issued to FTSL on July 25, 1997; that on July 21, 2005, FTCP's Board of Directors declared cash dividends amounting to Sixty Five Million Pesos (PhP65,000,000.00) out of the unappropriated retained earnings of Five Hundred Thirty Million Three Hundred Twenty Nine Thousand One Hundred Sixty Nine Pesos (PhP530,329,169.00) as of March 31, 2005, to be paid on or before August 31, 2005 to stockholders of record as of July 21, 2005, at the rate of Fifty Pesos (PhP50.00) per share; that the amount of cash dividends which pertains to FTL is Forty Eight Million Seven Hundred Fifty Thousand Pesos (PhP48,750,000.00) and to FTSL, Sixteen Million Two Hundred Fifty Thousand Pesos (PhP16,250,000.00); and that the issue/s or transaction subject of the above request for ruling is not under investigation neither is it subject of an on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, collection proceedings nor a judicial appeal. DHaEAS In reply, please be informed that dividends received by FTL and FTSL are subject to Philippine tax as follows: 1. for FTSL Article 10 of the Philippines-Singapore tax treaty provides as follows: "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. 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 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 FTSL held 25% percent of the total outstanding capital stock of FTCP from July 25, 1997 as evidenced by a stock certificate issued in favor of FTSL, dividends received by FTSL 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 ) 2. for FTL Article 10 of the Philippines-Japan tax treaty provides as follows: "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. ESDHCa (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. 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 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 July 21, 2005, FTL holds only 75% of the outstanding capital stocks of FTCP, as shown in the Certification issued by the Corporate Secretary of FTCP dated August 17, 2005, the dividends paid to FTL by FTCP are subject to 10% preferential tax rate pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. ( BIR Ruling No. 165-94 dated December 5, 1994 ) 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service