Temporarily Modifying the Rates of Import Duty on Rice under Section 1611 of R.A. No. 10863 (Customs Modernization and Tariff Act)

September 11, 2015 ITAD BIR RULING NO. 272-15 Article 10 (Dividends), Philippines-Japan tax treaty Sycip Gorres Velayo & Co. 6760 Ayala Avenue, 1226 Makati City Attention: Carolina A. Racelis Authorized Representative Gentlemen : This refers to your application for tax treaty relief dated 11 July 2014 requesting confirmation that dividends paid by Taganito Mining Corporation ("Taganito-Philippines") to Sojitz Corporation ("Sojitz-Japan") are subject to final withholding tax at the preferential rate of fifteen percent (15%) pursuant to the Convention between the Republic of the Philippines and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income ("Philippines-Japan tax treaty") , as amended. 1 It is represented that Sojitz-Japan is a non-resident foreign corporation organized and existing under the laws of Japan and is a company engaged in the business of purchasing, selling, importing and exporting several products such as textile, food, and fertilizer, among others based on the notarized and consularized Application for Residency Confirmation from the Kojimachi Tax Office of Japan and Articles of Incorporation of Sojitz-Japan . The company Sojitz-Japan is not registered as a corporation or partnership in the Philippines based on the Certificate of Non-Registration of Company from the Securities and Exchange Commission (SEC) issued on 8 July 2014. Taganito-Philippines , on the other hand, is a domestic corporation organized and existing under Philippine laws. Sojitz Corporation-Philippine Branch ("Sojitz-Philippine Branch") is a branch of Sojitz-Japan in the Philippines. It is further represented that Sojitz-Japan owns 1.5% of the authorized capital stock of Taganito-Philippines amounting to Twenty Two Million Five Hundred Thousand (22,500,000) common shares valued at Twenty Two Million Five Hundred Thousand Pesos (Php22,500,000.00) acquired by way of purchase as of 31 May 2014; that on 09 June 2014, Taganito-Philippines declared cash dividends in the amount of Three Hundred Million (Php300,000,000.00) in favor of all stockholders of record as of 31 May 2014 based on the notarized Secretary's Certificate of Taganito-Philippines . It is also represented that the dividends received by Sojitz-Japan form Taganito-Philippines do not form part of the assets of Sojitz-Philippine Branch based on a notarized Certification from Sojitz-Philippine Branch . It is finally represented that the dividends subject of this ruling are not under investigation, on-going audit, administrative protest, claim for refund or issuance of a tax credit certificate, judicial or administrative protest, collection proceedings or judicial appeal based on the Sworn Statement of Taganito-Philippines . In reply, please be informed that under Section 28 (B) (1) of the National Internal Revenue Code of 1997 ("NIRC of 1997") , as amended, dividends paid to Sojitz-Japan are subject to income tax at the rate of 30 percent, thus: "SEC. 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 interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) and (d) above: n Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%)". However, under Section 32 (B) (5) of the Tax Code, these dividends may be exempt from income tax or subject to a reduced rate to the extent required by any treaty obligation on the Philippines, thus: "SEC. 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. " For this purpose, you invoke the Philippines-Japan tax treaty. Paragraphs 1 and 2 of Article 10 on Dividends thereof provide: "Article 10 Dividend s 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 the Contracting State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed: a) 10 percent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 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) 15 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. cDHAES xxx xxx xxx 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." Based on the above-quoted provisions, dividends arising in the Philippines and paid to a resident of Japan may be taxed in the Philippines at a rate not to exceed (a) 10% if the company recipient of the dividends holds directly at least 10% of the voting shares or the total shares of the company paying the dividends, during the period of 6 months immediately preceding the date of payment of the dividends and (b) 15% in all other cases. On the question of whether dividends are effectively connected with a permanent establishment, the Supreme Court ruled in Marubeni Corporation vs. Commissioner of Internal Revenue and Court of Tax Appeals (G.R. No. 76573 dated September 14, 1989) , that dividends derived by a foreign corporation may be effectively connected with its office in the Philippines if the business activities that give rise to such dividends are conducted through the said office, thus: " 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 once, following the principal-agent relationship theory . It is understood 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 the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation." (Underscoring supplied) It is also worth mentioning that commentaries of the Organisation for Economic Cooperation and Development ("OECD") Model Tax Convention on Income and on Capital (Condensed Version, July 17, 2008 ) mention that dividends are effectively connected with the permanent establishment if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment, thus: " 24. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of the beneficiary's residence where the beneficiary has a permanent establishment in the former State. Paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) is not based on such conception which is sometimes referred to as 'the force of attraction of the permanent establishment'. It does not stipulate that dividend's flowing to a resident of a Contracting State from a source situated in the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may have in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the beneficiary which is a resident in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment . In that case, paragraph 4 (paragraph 5 of Article 10 of the Philippines-Japan tax treaty) relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentary on Article 7 (on Business Profits)." (Underscoring supplied) (Pages 156-157) ASEcHI Accordingly, the holdings in respect of the dividends paid by Taganito-Philippines to Sojitz-Japan are not effectively connected with Sojitz-Philippine Branch since they are not paid in respect of holdings forming part of the assets of Sojitz-Philippine Branch , or otherwise effectively connected therewith, and since the business activities that give rise to such dividends are not conducted through Sojitz-Philippine Branch . This is because: 1) the dividends paid to Sojitz-Japan by Taganito-Philippines do not form part of the assets of Sojitz-Philippine Branch ; 2) Sojitz-Philippine Branch has no participation whatsoever, directly or indirectly, in the investments of Sojitz-Japan ; and 3) Sojitz-Philippine Branch has no connection with the dividends to be received by Sojitz-Japan from Taganito-Philippines . Considering that Sojitz-Japan owns 1.5% or 22,500,000 common shares in Taganito-Philippines , which is less than the 10 of the authorized capital stock of Taganito-Philippines , this Office is of the opinion and so holds that the dividends paid by Taganito-Philippines to Sojitz-Japan are subject to the preferential tax rate of 15 percent of the gross amount thereof pursuant to Article 10 (2) (b) of the Philippines-Japan tax treaty, as amended. This ruling is issued on the basis of 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, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Protocol Amending the PH-Japan treaty. n Note from the Publisher: The phrase "and (d) above" no longer appears in RA 9337, the law amending this provision.