DA ITAD BIR Ruling No. 171-06

December 20, 2006 DA ITAD BIR RULING NO. 171-06 Article 10, Philippines-Japan tax treaty; BIR Ruling No. DA-ITAD-122-04 Ideal World Corporation Tres Cruses Rd. Bgy. de Ocampo Trece Martires City Cavite Attention: Mr. Mario M. Guy Chief Finance Officer Gentlemen : This refers to your application for tax treaty relief dated September 30, 2005, requesting confirmation that the dividend payments of Ideal World Corporation (IWC) to Happy World Incorporated (HWI) are subject to the 10% preferential withholding tax rate pursuant to Article 10 of the Philippines-Japan tax treaty. It is represented that HWI is a nonresident foreign corporation organized and existing under the laws of Japan with Business Registration No. 0110-01-018814 and with office address at Jingumae Happy Bldg., 6-19-14 Jingumae Shibuya-ku, Tokyo, Japan; that it is not registered either as a corporation or as a partnership licensed to do business in the Philippines per Certification dated September 14, 2005 issued by the Securities and Exchange Commission; that IWC is a domestic corporation organized and existing under the laws of the Philippines, with office address at Tres Cruses Rd., Bgy. de Ocampo, Trece Martires City, Cavite, Philippines. It is further represented that as of March 16, 2005 to September 16, 2005, HWI owned Twenty One Thousand Eight Hundred (21,800) shares amounting to Two Million One Hundred Eighty Thousand Pesos (PhP2,180,000.00), representing 36.3% of the total shares in IWC; that on July 30, 2005, the Board of Directors of IWC resolved and approved the declaration of cash dividends of Five Pesos (PhP5.00) per share amounting to Three Hundred Thousand Pesos (PhP300,000.00) from the corporation's unrestricted retained earnings, payable to stockholders of record as of June 30, 2005, distributable on September 16, 2005. SAaTHc 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. 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 of the issuing 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. Considering that as of March 16, 2005 and up to September 16, 2005. HWI held 36.3% of the outstanding capital stock of IWC, as shown in the Certification issued by the Corporate Secretary of IWC dated June 2, 2006, the dividends paid to HWI by IWC are subject to the 10% preferential tax rate, pursuant to Article 10(2)(a) of the Philippines-Japan tax treaty. ( BIR Ruling No. DA-ITAD-122-04 dated November 3, 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. DTCAES Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service