DA ITAD BIR Ruling No. 118-06

October 10, 2006 DA ITAD BIR RULING NO. 118-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD 122-04; ITAD Ruling No. 16-05 C & E Corporation Meralco Avenue corner General Araneta St. Pasig City, Metro Manila Philippines 1603 Attention: Ms. Lourdes P. Reyes Finance/Admin. Principal Manager and Treasurer Gentlemen : This refers to your application for tax treaty relief dated August 30, 2005, requesting confirmation that the dividend payments of C & E Corporation to Chiyoda Corporation are subject to the 10% preferential withholding tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that Chiyoda Corporation is a nonresident foreign corporation organized and existing under the laws of Japan with office address at 12-1 Tsurumichuo, 2-chome, Tsurumi-ku, Yokohama, Japan 230-8601; that it was licensed to establish its regional or area headquarters in the Philippines on April 29, 2004 per Certification dated August 26, 2005 issued by the Securities and Exchange Commission; that the Chiyoda Corporation regional or area headquarters (RHQ) does not participate in any manner in the management of C & E Corporation and its activities are limited to acting as supervisory, communications and coordinating activities for C & E Corporation; that C & E Corporation is a corporation organized and existing under the laws of the Philippines, with office address at Meralco Avenue, corner General Araneta Street, Pasig City, Metro Manila, Philippines; that C & E Corporation is duly registered with the Board of Investments as a New Service Exporter in the fields of Design and Construction of Industrial Plants under Certificate of Registration No. 96-168 dated August 9, 1996 and as a New IT Service Export Service Firm in the Field of Engineering Plan and Design of Industrial Plants under Certificate of Registration No. EP2002-112 dated August 27, 2002; that per certification by the C & E Corporation's Corporate Secretary dated September 14, 2005, Chiyoda Corporations' percentage of ownership of shares of stock in C & E Corporation is as follows: cDCaHA February 15, 1995 to June 11, 2005 to June 10, 2005 September 14, 2005 No. of shares 20,246 20,246 Par value per share PhP1,000.00 PhP1,000.00 Total Amount PhP20,246,000.00 PhP20,246,000.00 Authorized Cap. Stock PhP27,000,000.00 PhP31,153,000.00 % to total 75% 65% It is further represented that during the meeting held on June 10, 2005, the Board of Directors of C & E Corporation resolved and approved the declaration of cash dividends in the total amount of One Hundred Sixty Five Million Thirteen Thousand Two Hundred Seventy One Pesos (PhP165,013,271.00) from its unrestricted retained earnings; and that payment of the cash dividends declared shall be Forty Million Pesos (PhP40,000,000.00) in July 2005, Thirty Million Pesos (PhP30,000,000.00) in December 2005, and the balance of Ninety Five Million Thirteen Thousand Two Hundred Seventy One Pesos (PhP95,013,271.00) payable in six (6) years beginning Year 2006. In reply, please be informed that 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. 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. ESCcaT 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. 5. The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. xxx xxx xxx" Based on the abovequoted 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 directly at least 25 percent either of the voting shares or of the total shares of the issuing company during the period of six (6) months immediately preceding the date of payment of the dividends. The preceding paragraph, however, does not apply if the recipient of the dividend, being a resident of Japan, carries on business in the Philippines through a permanent establishment to which the dividend income is attributable. Relative thereto, Article 5 of the Philippines-Japan tax treaty provides: "Article 5 1. For the purposes of this Convention, the term 'permanent establishment' means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term 'permanent establishment' includes especially: a) a store or other sales outlet; b) a branch; c) an office; d) a factory; e) a workshop; TcIAHS f) a warehouse; g) a mine, an oil or gas well, a quarry or other place of extraction of natural resources. 3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. 4. Notwithstanding the preceding provisions of this Article, the term 'permanent establishment' shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of preparatory or auxiliary character." xxx xxx xxx" Based on paragraph 2(c), Chiyoda Corporation may be considered as having a permanent establishment in the Philippines since it maintains therein a representative office. However, in the instant case, since it was shown that the function of the representative office in the Philippines is limited only to acting as a supervisory, communications and coordinating activities for C & E Corporation, then Chiyoda Corporation is not deemed to have a permanent establishment in the Philippines. EaScHT Therefore, considering that from February 15, 1995 to June 10, 2005, Chiyoda Corporation directly held 75% of the total shares of C & E Corporation and that as of June 11, 2005 to date, Chiyoda Corporation directly holds 65% of the total shares of C & E Corporation, dividends payable to Chiyoda Corporation in July 2005 in the amount of Forty Million Pesos (PhP40,000,000.00), and in December 2005 in the amount of Thirty Million Pesos (PhP30,000,000.00), are subject to the 10% preferential tax rate based on the gross amount thereof, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty ( BIR Ruling No. DA-ITAD-122-04 dated November 3, 2004; ITAD Ruling No. 16-05 dated February 24, 2005 ). Likewise, dividends declared in June 10, 2005 in the amount of Ninety Five Million Thirteen Thousand Two Hundred Seventy One Pesos (PhP95,013,271.00) and payable to Chiyoda Corporation in six (6) years beginning year 2006 are subject to such 10% preferential tax rate under the Philippines-Japan tax treaty. 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